There Are Reasons To Feel Uneasy About Sebo Manufacturing Engineering & Construction's (KOSDAQ:011560) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 Sebo Manufacturing Engineering & Construction (KOSDAQ:011560) 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?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Sebo Manufacturing Engineering & Construction, this is the formula:

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

0.044 = ₩7.0b ÷ (₩312b - ₩152b) (Based on the trailing twelve months to December 2020).

Thus, Sebo Manufacturing Engineering & Construction has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.4%.

See our latest analysis for Sebo Manufacturing Engineering & Construction

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sebo Manufacturing Engineering & Construction's ROCE against it's prior returns. If you're interested in investigating Sebo Manufacturing Engineering & Construction's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Sebo Manufacturing Engineering & Construction Tell Us?

In terms of Sebo Manufacturing Engineering & Construction's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.4% from 16% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Sebo Manufacturing Engineering & Construction's current liabilities have increased over the last five years to 49% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Sebo Manufacturing Engineering & Construction's ROCE

In summary, Sebo Manufacturing Engineering & Construction 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 13% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing: We've identified 4 warning signs with Sebo Manufacturing Engineering & Construction (at least 2 which are a bit unpleasant) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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