Can Taihan Electric Wire (KRX:001440) Continue To Grow Its Returns On Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Taihan Electric Wire (KRX:001440) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Taihan Electric Wire is:

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

0.17 = ₩61b ÷ (₩1.2t - ₩813b) (Based on the trailing twelve months to September 2020).

So, Taihan Electric Wire has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Electrical industry.

See our latest analysis for Taihan Electric Wire

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 Taihan Electric Wire's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at Taihan Electric Wire. We found that the returns on capital employed over the last five years have risen by 218%. The company is now earning ₩0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 62% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 69% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line

From what we've seen above, Taihan Electric Wire has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 56% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing, we've spotted 1 warning sign facing Taihan Electric Wire that you might find interesting.

While Taihan Electric Wire isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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