Capital Allocation Trends At Iljin Power (KOSDAQ:094820) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Iljin Power (KOSDAQ:094820) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Iljin Power:

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

0.081 = ₩13b ÷ (₩207b - ₩48b) (Based on the trailing twelve months to June 2024).

Therefore, Iljin Power has an ROCE of 8.1%. On its own that's a low return, but compared to the average of 6.2% generated by the Machinery industry, it's much better.

View our latest analysis for Iljin Power

Historical performance is a great place to start when researching a stock so above you can see the gauge for Iljin Power's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Iljin Power.

What The Trend Of ROCE Can Tell Us

In terms of Iljin Power's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.1% from 16% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Iljin Power is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 127% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 2 warning signs we've spotted with Iljin Power (including 1 which can't be ignored) .

While Iljin Power may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.