If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after briefly looking over the numbers, we don't think GAON CABLE (KRX:000500) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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. The formula for this calculation on GAON CABLE is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = ₩13b ÷ (₩630b - ₩265b) (Based on the trailing twelve months to September 2020).
So, GAON CABLE has an ROCE of 3.5%. 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 GAON CABLE
Historical performance is a great place to start when researching a stock so above you can see the gauge for GAON CABLE's ROCE against it's prior returns. If you'd like to look at how GAON CABLE has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For GAON CABLE Tell Us?
There hasn't been much to report for GAON CABLE's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at GAON CABLE in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 42% of total assets, this reported ROCE would probably be less than3.5% because total capital employed would be higher.The 3.5% ROCE could be even lower if current liabilities weren't 42% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.
The Key Takeaway
We can conclude that in regards to GAON CABLE's returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly, the stock has only gained 38% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
On a separate note, we've found 2 warning signs for GAON CABLE you'll probably want to know about.
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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About KOSE:A000500
GAON CABLE
A cable company, provides industrial power cables in South Korea.
Excellent balance sheet and fair value.
