SL (KRX:005850) Hasn't Managed To Accelerate Its Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating SL (KRX:005850), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on SL is:

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

0.06 = ₩93b ÷ (₩2.3t - ₩774b) (Based on the trailing twelve months to December 2020).

So, SL has an ROCE of 6.0%. On its own, that's a low figure but it's around the 5.1% average generated by the Auto Components industry.

See 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 report for SL.

What Can We Tell From SL's ROCE Trend?

There are better returns on capital out there than what we're seeing at SL. The company has employed 58% more capital in the last five years, and the returns on that capital have remained stable at 6.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

As we've seen above, SL's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 70% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing SL, we've discovered 1 warning sign that you should be aware of.

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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