Some Investors May Be Worried About DK-Lok's (KOSDAQ:105740) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating DK-Lok (KOSDAQ:105740), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 DK-Lok:

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

0.013 = ₩1.9b ÷ (₩194b - ₩55b) (Based on the trailing twelve months to June 2024).

Thus, DK-Lok has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.4%.

See our latest analysis for DK-Lok

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how DK-Lok has performed in the past in other metrics, you can view this free graph of DK-Lok's past earnings, revenue and cash flow.

What Does the ROCE Trend For DK-Lok Tell Us?

When we looked at the ROCE trend at DK-Lok, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 1.3%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From DK-Lok's ROCE

In summary, we're somewhat concerned by DK-Lok's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 19% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching DK-Lok, you might be interested to know about the 4 warning signs that our analysis has discovered.

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. 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.