What We Make Of Korea Flange's (KRX:010100) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, we've noticed some promising trends at Korea Flange (KRX:010100) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Korea Flange:

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

0.043 = ₩13b ÷ (₩685b - ₩386b) (Based on the trailing twelve months to September 2020).

Therefore, Korea Flange has an ROCE of 4.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.1%.

View our latest analysis for Korea Flange

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

What The Trend Of ROCE Can Tell Us

While there are companies with higher returns on capital out there, we still find the trend at Korea Flange promising. The figures show that over the last five years, ROCE has grown 296% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Another thing to note, Korea Flange has a high ratio of current liabilities to total assets of 56%. 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.

Our Take On Korea Flange's ROCE

In summary, we're delighted to see that Korea Flange has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Considering the stock has delivered 4.3% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Korea Flange does come with some risks though, we found 7 warning signs in our investment analysis, and 2 of those are potentially serious...

While Korea Flange 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. 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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