Will The ROCE Trend At Korea Flange (KRX:010100) Continue?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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, Korea Flange (KRX:010100) 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. The formula for this calculation on Korea Flange is:

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).

Thus, Korea Flange has an ROCE of 4.3%. Even though it's in line with the industry average of 4.0%, it's still a low return by itself.

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 want to delve into the historical earnings, revenue and cash flow of Korea Flange, check out these free graphs here.

So How Is Korea Flange's ROCE Trending?

While there are companies with higher returns on capital out there, we still find the trend at Korea Flange promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 296% over the last five years. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Korea Flange's current liabilities are still rather high at 56% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To bring it all together, Korea Flange has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 26% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Korea Flange does have some risks, we noticed 6 warning signs (and 2 which don't sit too well with us) we think you should know about.

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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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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