We Like These Underlying Trends At Daedong Industrial (KRX:000490)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Daedong Industrial's (KRX:000490) returns on capital, so let's have a look.

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. The formula for this calculation on Daedong Industrial is:

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

0.069 = ₩32b ÷ (₩945b - ₩482b) (Based on the trailing twelve months to September 2020).

Therefore, Daedong Industrial has an ROCE of 6.9%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.4%.

Check out our latest analysis for Daedong Industrial

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're interested in investigating Daedong Industrial's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Daedong Industrial's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 6.9%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 25%. So we're very much inspired by what we're seeing at Daedong Industrial thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Daedong Industrial has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Daedong Industrial's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Daedong Industrial has. Given the stock has declined 22% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 2 warning signs for Daedong Industrial that we think you should be aware of.

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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