Returns On Capital Are Showing Encouraging Signs At SL (KRX:005850)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, SL (KRX:005850) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for SL, this is the formula:

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

0.19 = ₩421b ÷ (₩3.4t - ₩1.2t) (Based on the trailing twelve months to March 2024).

So, SL has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Auto Components industry.

Check out our latest analysis for SL

In the above chart we have measured SL's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for SL .

What The Trend Of ROCE Can Tell Us

SL is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 19%. The amount of capital employed has increased too, by 88%. So we're very much inspired by what we're seeing at SL thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, SL has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching SL, you might be interested to know about the 1 warning sign that our analysis has discovered.

While SL isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com