Stock Analysis

Will Dongyang E&P's (KOSDAQ:079960) Growth In ROCE Persist?

KOSDAQ:A079960
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Dongyang E&P (KOSDAQ:079960) so let's look a bit deeper.

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. To calculate this metric for Dongyang E&P, this is the formula:

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

0.14 = ₩38b ÷ (₩331b - ₩71b) (Based on the trailing twelve months to September 2020).

So, Dongyang E&P has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Electrical industry.

See our latest analysis for Dongyang E&P

roce
KOSDAQ:A079960 Return on Capital Employed February 26th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dongyang E&P's ROCE against it's prior returns. If you'd like to look at how Dongyang E&P has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Dongyang E&P are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 14%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 40%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 21%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Dongyang E&P's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Dongyang E&P has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 66% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 1 warning sign for Dongyang E&P you'll probably want to 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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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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