Returns On Capital At Cheryong IndustrialLtd (KOSDAQ:147830) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Cheryong IndustrialLtd (KOSDAQ:147830) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Cheryong IndustrialLtd, this is the formula:

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

0.039 = ₩2.9b ÷ (₩82b - ₩7.6b) (Based on the trailing twelve months to March 2024).

Thus, Cheryong IndustrialLtd has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.1%.

See 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 covering Cheryong IndustrialLtd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Cheryong IndustrialLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.1%, but since then they've fallen to 3.9%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Cheryong IndustrialLtd's ROCE

In summary, we're somewhat concerned by Cheryong IndustrialLtd's diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 277% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 3 warning signs with Cheryong IndustrialLtd (at least 1 which is significant) , and understanding these would certainly be useful.

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.

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