What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. 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. The formula for this calculation on PlumbFast is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = ₩1.7b ÷ (₩38b - ₩3.1b) (Based on the trailing twelve months to June 2020).
Thus, PlumbFast has an ROCE of 4.9%. In absolute terms, that's a low return but it's around the Building industry average of 4.1%.
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're interested in investigating PlumbFast's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For PlumbFast Tell Us?
On the surface, the trend of ROCE at PlumbFast doesn't inspire confidence. Around five years ago the returns on capital were 8.9%, but since then they've fallen to 4.9%. 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 8.1% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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...
From the above analysis, we find it rather worrisome that returns on capital and sales for PlumbFast have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 104% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One more thing: We've identified 2 warning signs with PlumbFast (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.
While PlumbFast 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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About KOSDAQ:A035200
Excellent balance sheet and fair value.
