Daechang Forging (KRX:015230) Will Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Daechang Forging (KRX:015230) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. Analysts use this formula to calculate it for Daechang Forging:

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

0.09 = ₩19b ÷ (₩247b - ₩35b) (Based on the trailing twelve months to December 2020).

Thus, Daechang Forging has an ROCE of 9.0%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.3%.

See our latest analysis for Daechang Forging

Historical performance is a great place to start when researching a stock so above you can see the gauge for Daechang Forging's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Daechang Forging, check out these free graphs here.

What Does the ROCE Trend For Daechang Forging Tell Us?

On the surface, the trend of ROCE at Daechang Forging doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.0% from 12% five years ago. However it looks like Daechang Forging might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line On Daechang Forging's ROCE

Bringing it all together, while we're somewhat encouraged by Daechang Forging's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 48% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 1 warning sign facing Daechang Forging that you might find interesting.

While Daechang Forging 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.

When trading Daechang Forging or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.