Our Take On The Returns On Capital At SDN Company (KOSDAQ:099220)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at SDN Company (KOSDAQ:099220) 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 SDN Company:

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

0.018 = ₩2.1b ÷ (₩158b - ₩43b) (Based on the trailing twelve months to September 2020).

So, SDN Company has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 7.2%.

See our latest analysis for SDN Company

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

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 4.5% five years ago, while capital employed has grown 106%. Usually this isn't ideal, but given SDN Company conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence SDN Company might not have received a full period of earnings contribution from it.

On a related note, SDN Company has decreased its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On SDN Company's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that SDN Company is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 218% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about SDN Company, we've spotted 3 warning signs, and 1 of them can't be ignored.

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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