What Do The Returns On Capital At Shinsegae Engineering & Construction (KRX:034300) Tell Us?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Shinsegae Engineering & Construction (KRX:034300) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Shinsegae Engineering & Construction is:

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

0.076 = ₩20b ÷ (₩796b - ₩530b) (Based on the trailing twelve months to September 2020).

Therefore, Shinsegae Engineering & Construction has an ROCE of 7.6%. In absolute terms, that's a low return but it's around the Construction industry average of 9.0%.

View our latest analysis for Shinsegae Engineering & Construction

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shinsegae Engineering & Construction's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Shinsegae Engineering & Construction, check out these free graphs here.

So How Is Shinsegae Engineering & Construction's ROCE Trending?

In terms of Shinsegae Engineering & Construction's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 34% over the last five years. However it looks like Shinsegae Engineering & Construction 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.

On a related note, Shinsegae Engineering & Construction has decreased its current liabilities to 67% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 67% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

To conclude, we've found that Shinsegae Engineering & Construction is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 26% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing: We've identified 3 warning signs with Shinsegae Engineering & Construction (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

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.

If you’re looking to trade Shinsegae Engineering & Construction, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.