Should You Be Impressed By SFA Engineering's (KOSDAQ:056190) Returns on Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at SFA Engineering's (KOSDAQ:056190) ROCE trend, we were pretty happy with what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for SFA Engineering:

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

0.15 = ₩203b ÷ (₩1.7t - ₩337b) (Based on the trailing twelve months to September 2020).

Thus, SFA Engineering has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.4% generated by the Machinery industry.

See our latest analysis for SFA Engineering

In the above chart we have measured SFA Engineering's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SFA Engineering.

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 171% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that SFA Engineering has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From SFA Engineering's ROCE

In the end, SFA Engineering has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 85% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a final note, we've found 1 warning sign for SFA Engineering that we think you should be aware of.

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. 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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