The Returns At DRB Holding (KRX:004840) Provide Us With Signs Of What's To Come

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at DRB Holding (KRX:004840), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for DRB Holding:

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

0.036 = ₩20b ÷ (₩801b - ₩253b) (Based on the trailing twelve months to September 2020).

Thus, DRB Holding has an ROCE of 3.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.1%.

Check out our latest analysis for DRB Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for DRB Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of DRB Holding, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at DRB Holding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.6% from 19% five years ago. However it looks like DRB Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On DRB Holding's ROCE

To conclude, we've found that DRB Holding is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 27% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 4 warning signs with DRB Holding (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

While DRB Holding 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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