Here’s What’s Happening With Returns At Dgenx (KOSDAQ:113810)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Dgenx (KOSDAQ:113810) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Dgenx is:

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 4.1%.

Check out our latest analysis for Dgenx

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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.

So How Is Dgenx's ROCE Trending?

It's great to see that Dgenx has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Dgenx is using 28% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

Another thing to note, Dgenx has a high ratio of current liabilities to total assets of 64%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Dgenx's ROCE

In a nutshell, we're pleased to see that Dgenx has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 48% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 3 warning signs for Dgenx (1 can't be ignored) you should be aware of.

While Dgenx may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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