Returns On Capital At Kwang Myung ElectricLtd (KRX:017040) Paint An Interesting Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 investigating Kwang Myung ElectricLtd (KRX:017040), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Kwang Myung ElectricLtd is:

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

0.063 = ₩7.3b ÷ (₩159b - ₩44b) (Based on the trailing twelve months to September 2020).

Thus, Kwang Myung ElectricLtd has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Electrical industry average of 6.8%.

View our latest analysis for Kwang Myung ElectricLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kwang Myung ElectricLtd's ROCE against it's prior returns. If you'd like to look at how Kwang Myung ElectricLtd 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 Kwang Myung ElectricLtd's ROCE Trend?

When we looked at the ROCE trend at Kwang Myung ElectricLtd, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 6.3%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Kwang Myung ElectricLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Kwang Myung ElectricLtd's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 20% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we've found 1 warning sign for Kwang Myung ElectricLtd that we think you should be aware of.

While Kwang Myung ElectricLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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