We Like These Underlying Trends At Daewoo Shipbuilding & Marine Engineering (KRX:042660)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Daewoo Shipbuilding & Marine Engineering (KRX:042660) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Daewoo Shipbuilding & Marine Engineering:

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

0.079 = ₩505b ÷ (₩11t - ₩4.1t) (Based on the trailing twelve months to September 2020).

So, Daewoo Shipbuilding & Marine Engineering has an ROCE of 7.9%. On its own that's a low return, but compared to the average of 5.4% generated by the Machinery industry, it's much better.

See our latest analysis for Daewoo Shipbuilding & Marine Engineering

Above you can see how the current ROCE for Daewoo Shipbuilding & Marine Engineering compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Daewoo Shipbuilding & Marine Engineering Tell Us?

Daewoo Shipbuilding & Marine Engineering has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 7.9% which is a sight for sore eyes. In addition to that, Daewoo Shipbuilding & Marine Engineering is employing 67% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 39%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Daewoo Shipbuilding & Marine Engineering has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Daewoo Shipbuilding & Marine Engineering's ROCE

To the delight of most shareholders, Daewoo Shipbuilding & Marine Engineering has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 58% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing: We've identified 3 warning signs with Daewoo Shipbuilding & Marine Engineering (at least 2 which are a bit unpleasant) , and understanding them would certainly be useful.

While Daewoo Shipbuilding & Marine 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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