Cheryong IndustrialLtd (KOSDAQ:147830) Will Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at Cheryong IndustrialLtd (KOSDAQ:147830), it didn't seem to tick all of these boxes.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Cheryong IndustrialLtd:

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

0.05 = ₩3.1b ÷ (₩66b - ₩4.0b) (Based on the trailing twelve months to December 2020).

Thus, Cheryong IndustrialLtd has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.8%.

View our latest analysis for Cheryong IndustrialLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cheryong IndustrialLtd's ROCE against it's prior returns. If you're interested in investigating Cheryong IndustrialLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Cheryong IndustrialLtd Tell Us?

When we looked at the ROCE trend at Cheryong IndustrialLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

On a related note, Cheryong IndustrialLtd has decreased its current liabilities to 6.1% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 Cheryong IndustrialLtd's ROCE

In summary, Cheryong IndustrialLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 138% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Cheryong IndustrialLtd (of which 1 can't be ignored!) that you should 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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