What Do The Returns On Capital At DRB Industrial (KRX:163560) Tell Us?

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. However, after briefly looking over the numbers, we don't think DRB Industrial (KRX:163560) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for DRB Industrial, this is the formula:

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

0.073 = ₩16b ÷ (₩276b - ₩59b) (Based on the trailing twelve months to September 2020).

Therefore, DRB Industrial has an ROCE of 7.3%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 4.1%.

Check out our latest analysis for DRB Industrial

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

So How Is DRB Industrial's ROCE Trending?

On the surface, the trend of ROCE at DRB Industrial doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 7.3%. However it looks like DRB Industrial might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that DRB Industrial is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 15% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we found 3 warning signs for DRB Industrial (1 can't be ignored) 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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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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