Dgenx (KOSDAQ:113810) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Dgenx's (KOSDAQ:113810) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Dgenx, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.066 = ₩1.9b ÷ (₩80b - ₩51b) (Based on the trailing twelve months to September 2020).

Therefore, Dgenx has an ROCE of 6.6%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 4.6%.

Check out our latest analysis for Dgenx

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dgenx's ROCE against it's prior returns. If you'd like to look at how Dgenx has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Dgenx's ROCE Trend?

We're delighted to see that Dgenx is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 28% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

On a separate but related note, it's important to know that Dgenx has a current liabilities to total assets ratio of 64%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Dgenx's ROCE

In summary, it's great to see that Dgenx has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 36% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Dgenx does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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