What Do The Returns At Ilsung Construction (KRX:013360) Mean Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Ilsung Construction (KRX:013360) and its trend of ROCE, we really liked what we saw.

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

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. To calculate this metric for Ilsung Construction, this is the formula:

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

0.045 = ₩6.6b ÷ (₩336b - ₩190b) (Based on the trailing twelve months to June 2020).

Therefore, Ilsung Construction has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.5%.

View our latest analysis for Ilsung Construction

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 Ilsung Construction's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Ilsung Construction Tell Us?

Ilsung Construction has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.5% on its capital. And unsurprisingly, like most companies trying to break into the black, Ilsung Construction is utilizing 25% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

Another thing to note, Ilsung Construction has a high ratio of current liabilities to total assets of 56%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

Overall, Ilsung Construction gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

Ilsung Construction does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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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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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