Woowon Development (KOSDAQ:046940) Is Reinvesting At Lower Rates Of Return

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Woowon Development (KOSDAQ:046940) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Woowon Development is:

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

0.014 = ₩1.6b ÷ (₩199b - ₩86b) (Based on the trailing twelve months to September 2024).

Thus, Woowon Development has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.6%.

Check out our latest analysis for Woowon Development

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

What Can We Tell From Woowon Development's ROCE Trend?

When we looked at the ROCE trend at Woowon Development, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.4% from 24% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Woowon Development has a current liabilities to total assets ratio of 43%, 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Woowon Development's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Woowon Development is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 68% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 2 warning signs with Woowon Development (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.