Sungdo Engineering & Construction (KOSDAQ:037350) Hasn't Managed To Accelerate Its Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Sungdo Engineering & Construction (KOSDAQ:037350), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Sungdo Engineering & Construction:

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

0.089 = ₩35b ÷ (₩647b - ₩254b) (Based on the trailing twelve months to September 2024).

Thus, Sungdo Engineering & Construction has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 6.6%.

See our latest analysis for Sungdo Engineering & Construction

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

The Trend Of ROCE

In terms of Sungdo Engineering & Construction's historical ROCE trend, it doesn't exactly demand attention. The company has employed 72% more capital in the last five years, and the returns on that capital have remained stable at 8.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Sungdo Engineering & Construction has done well to reduce current liabilities to 39% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

As we've seen above, Sungdo Engineering & Construction's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 65% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Sungdo Engineering & Construction (of which 1 can't be ignored!) that you should know about.

While Sungdo Engineering & Construction isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.