Here’s What’s Happening With Returns At Sigong Tech (KOSDAQ:020710)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Sigong Tech (KOSDAQ:020710) so let's look a bit deeper.

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 Sigong Tech is:

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

0.069 = ₩7.9b ÷ (₩153b - ₩39b) (Based on the trailing twelve months to June 2020).

Thus, Sigong Tech has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.5%.

See our latest analysis for Sigong Tech

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

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.9%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 30%. So we're very much inspired by what we're seeing at Sigong Tech thanks to its ability to profitably reinvest capital.

What We Can Learn From Sigong Tech's ROCE

In summary, it's great to see that Sigong Tech can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 13% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 1 warning sign with Sigong Tech and understanding this should be part of your investment process.

While Sigong Tech may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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