What Do The Returns At Woongjin (KRX:016880) Mean Going Forward?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Woongjin (KRX:016880) 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 Woongjin is:

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

0.076 = ₩28b ÷ (₩1.1t - ₩699b) (Based on the trailing twelve months to September 2020).

So, Woongjin has an ROCE of 7.6%. In absolute terms, that's a low return, but it's much better than the Industrials industry average of 3.5%.

View our latest analysis for Woongjin

Historical performance is a great place to start when researching a stock so above you can see the gauge for Woongjin's ROCE against it's prior returns. If you'd like to look at how Woongjin has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Woongjin's ROCE Trend?

We're pretty happy with how the ROCE has been trending at Woongjin. The data shows that returns on capital have increased by 288% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 58% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 65% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In summary, it's great to see that Woongjin has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 69% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 4 warning signs we've spotted with Woongjin (including 2 which is shouldn't be ignored) .

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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