Some Investors May Be Worried About Dong-Ah Geological Engineering's (KRX:028100) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Dong-Ah Geological Engineering (KRX:028100), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.016 = ₩3.2b ÷ (₩335b - ₩136b) (Based on the trailing twelve months to December 2020).

Therefore, Dong-Ah Geological Engineering has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.4%.

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 want to delve into the historical earnings, revenue and cash flow of Dong-Ah Geological Engineering, check out these free graphs here.

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

When we looked at the ROCE trend at Dong-Ah Geological Engineering, we didn't gain much confidence. Around five years ago the returns on capital were 2.7%, but since then they've fallen to 1.6%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

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 41%, 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 Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Dong-Ah Geological Engineering have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 134% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 3 warning signs for Dong-Ah Geological Engineering you'll probably want to know about.

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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