Will Kwang Myung ElectricLtd (KRX:017040) Multiply In Value Going Forward?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Kwang Myung ElectricLtd (KRX:017040) 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. 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 6.5%.

View our latest analysis for Kwang Myung ElectricLtd

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 want to delve into the historical earnings, revenue and cash flow of Kwang Myung ElectricLtd, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Kwang Myung ElectricLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.3% from 13% five years ago. However it looks like Kwang Myung ElectricLtd 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.

Our Take On 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 in the last five years, the stock has given away 10% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with Kwang Myung ElectricLtd and understanding it should be part of your investment process.

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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