Our Take On The Returns On Capital At Daechang Forging (KRX:015230)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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)?

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. To calculate this metric for Daechang Forging, this is the formula:

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

0.089 = ₩19b ÷ (₩250b - ₩35b) (Based on the trailing twelve months to September 2020).

So, Daechang Forging has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 5.4%.

View 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 Can We Tell From Daechang Forging's ROCE Trend?

On the surface, the trend of ROCE at Daechang Forging doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 8.9%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

We're a bit apprehensive about Daechang Forging because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 31% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing Daechang Forging we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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