Will DawonsysLtd (KOSDAQ:068240) Multiply In Value Going Forward?

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at DawonsysLtd (KOSDAQ:068240), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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 DawonsysLtd is:

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

0.053 = ₩15b ÷ (₩545b - ₩254b) (Based on the trailing twelve months to June 2020).

So, DawonsysLtd has an ROCE of 5.3%. On its own, that's a low figure but it's around the 5.8% average generated by the Machinery industry.

See our latest analysis for DawonsysLtd

Above you can see how the current ROCE for DawonsysLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering DawonsysLtd here for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at DawonsysLtd. Over the past five years, ROCE has remained relatively flat at around 5.3% and the business has deployed 160% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 47% of total assets, this reported ROCE would probably be less than5.3% because total capital employed would be higher.The 5.3% ROCE could be even lower if current liabilities weren't 47% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

What We Can Learn From DawonsysLtd's ROCE

Long story short, while DawonsysLtd has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about DawonsysLtd, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

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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