Korea Aerospace Industries' (KRX:047810) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Korea Aerospace Industries (KRX:047810) and its ROCE trend, we weren't exactly thrilled.

What is 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. Analysts use this formula to calculate it for Korea Aerospace Industries:

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

0.055 = ₩140b ÷ (₩5.2t - ₩2.6t) (Based on the trailing twelve months to December 2020).

So, Korea Aerospace Industries has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Aerospace & Defense industry average of 5.4%.

See our latest analysis for Korea Aerospace Industries

Above you can see how the current ROCE for Korea Aerospace Industries 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.

The Trend Of ROCE

On the surface, the trend of ROCE at Korea Aerospace Industries doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. However it looks like Korea Aerospace Industries 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 side note, Korea Aerospace Industries' current liabilities have increased over the last five years to 51% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 5.5%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Korea Aerospace Industries' ROCE

In summary, Korea Aerospace Industries is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to continue researching Korea Aerospace Industries, you might be interested to know about the 4 warning signs that our analysis has discovered.

While Korea Aerospace Industries 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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