Should You Be Impressed By CS Holdings' (KRX:000590) Returns on Capital?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at CS Holdings (KRX:000590), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for CS Holdings:

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

0.056 = ₩17b ÷ (₩325b - ₩19b) (Based on the trailing twelve months to September 2020).

So, CS Holdings has an ROCE of 5.6%. On its own, that's a low figure but it's around the 5.4% average generated by the Machinery industry.

Check out our latest analysis for CS Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for CS Holdings' ROCE against it's prior returns. If you'd like to look at how CS Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From CS Holdings' ROCE Trend?

When we looked at the ROCE trend at CS Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.6% from 8.8% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

What We Can Learn From CS Holdings' ROCE

To conclude, we've found that CS Holdings is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 24% in the last five years. Therefore based on the analysis done in this article, we don't think CS Holdings has the makings of a multi-bagger.

If you want to know some of the risks facing CS Holdings we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

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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