Some Investors May Be Worried About DUAL's (KRX:016740) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating DUAL (KRX:016740), we don't think it's current trends fit the mold of a multi-bagger.

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 DUAL, this is the formula:

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

0.082 = ₩20b ÷ (₩406b - ₩158b) (Based on the trailing twelve months to December 2020).

Therefore, DUAL has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 5.1%.

See our latest analysis for DUAL

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

The Trend Of ROCE

When we looked at the ROCE trend at DUAL, we didn't gain much confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 8.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

On a related note, DUAL has decreased its current liabilities to 39% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, DUAL is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 15% to shareholders over the last three years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

DUAL does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is significant...

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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