If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Speaking of which, we noticed some great changes in Sangji Caelum's (KOSDAQ:042940) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sangji Caelum is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = ₩7.9b ÷ (₩175b - ₩116b) (Based on the trailing twelve months to September 2020).
So, Sangji Caelum has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 8.7% it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sangji Caelum's ROCE against it's prior returns. If you're interested in investigating Sangji Caelum's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Sangji Caelum's ROCE Trending?
We're delighted to see that Sangji Caelum is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 14% on its capital. And unsurprisingly, like most companies trying to break into the black, Sangji Caelum is utilizing 959% more capital than it was four years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a separate but related note, it's important to know that Sangji Caelum has a current liabilities to total assets ratio of 67%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Sangji Caelum's ROCE
In summary, it's great to see that Sangji Caelum has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 26% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Sangji Caelum does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.
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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