Has PlumbFast (KOSDAQ:035200) Got What It Takes To Become A Multi-Bagger?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at PlumbFast (KOSDAQ:035200) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for PlumbFast, this is the formula:

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

0.038 = ₩1.3b ÷ (₩37b - ₩2.2b) (Based on the trailing twelve months to September 2020).

So, PlumbFast has an ROCE of 3.8%. Even though it's in line with the industry average of 4.1%, it's still a low return by itself.

See our latest analysis for PlumbFast

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

What Does the ROCE Trend For PlumbFast Tell Us?

On the surface, the trend of ROCE at PlumbFast doesn't inspire confidence. To be more specific, ROCE has fallen from 9.0% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, PlumbFast has done well to pay down its current liabilities to 6.0% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

In summary, we're somewhat concerned by PlumbFast's diminishing returns on increasing amounts of capital. However the stock has delivered a 98% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 2 warning signs for PlumbFast (1 is a bit concerning) 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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