What Can The Trends At SC Engineering (KRX:023960) Tell Us About Their Returns?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at SC Engineering (KRX:023960) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on SC Engineering is:

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

0.011 = ₩2.6b ÷ (₩367b - ₩135b) (Based on the trailing twelve months to March 2020).

Thus, SC Engineering has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.4%.

Check out our latest analysis for SC Engineering

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

We're delighted to see that SC Engineering is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.1% on its capital. In addition to that, SC Engineering is employing 161% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, SC Engineering has decreased current liabilities to 37% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that SC Engineering has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

Long story short, we're delighted to see that SC Engineering's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 30% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 4 warning signs we've spotted with SC Engineering (including 1 which is is a bit concerning) .

While SC Engineering 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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