Dong-Ah Geological Engineering's (KRX:028100) Returns On Capital Not Reflecting Well On The Business

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Dong-Ah Geological Engineering (KRX:028100) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. To calculate this metric for Dong-Ah Geological Engineering, this is the formula:

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

0.031 = ₩6.9b ÷ (₩389b - ₩165b) (Based on the trailing twelve months to March 2024).

Therefore, Dong-Ah Geological Engineering has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.0%.

View our latest analysis for Dong-Ah Geological Engineering

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

What Does the ROCE Trend For Dong-Ah Geological Engineering Tell Us?

On the surface, the trend of ROCE at Dong-Ah Geological Engineering doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Dong-Ah Geological Engineering has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Dong-Ah Geological Engineering is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 34% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Dong-Ah Geological Engineering, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While Dong-Ah Geological Engineering may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.