Stock Analysis

What Do The Returns At GS Engineering & Construction (KRX:006360) Mean Going Forward?

KOSE:A006360
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at GS Engineering & Construction (KRX:006360) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for GS Engineering & Construction, this is the formula:

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

0.053 = ₩655b ÷ (₩14t - ₩1.4t) (Based on the trailing twelve months to September 2020).

Therefore, GS Engineering & Construction has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.5%.

See our latest analysis for GS Engineering & Construction

roce
KOSE:A006360 Return on Capital Employed November 24th 2020

In the above chart we have measured GS Engineering & Construction's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for GS Engineering & Construction.

How Are Returns Trending?

We're delighted to see that GS Engineering & Construction is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 5.3% which is a sight for sore eyes. Not only that, but the company is utilizing 99% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, GS Engineering & Construction has decreased current liabilities to 10% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

To the delight of most shareholders, GS Engineering & Construction has now broken into profitability. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 52% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 4 warning signs with GS Engineering & Construction and understanding them should be part of your investment process.

While GS Engineering & Construction may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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