Will DY Power's (KRX:210540) Growth In ROCE Persist?

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. Speaking of which, we noticed some great changes in DY Power's (KRX:210540) returns on capital, so let's have a look.

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 DY Power, this is the formula:

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

0.12 = ₩23b ÷ (₩278b - ₩76b) (Based on the trailing twelve months to September 2020).

Therefore, DY Power has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.4% it's much better.

See our latest analysis for DY Power

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

So How Is DY Power's ROCE Trending?

The trends we've noticed at DY Power are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The amount of capital employed has increased too, by 60%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, DY Power has decreased current liabilities to 27% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what DY Power has. And a remarkable 148% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching DY Power, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.
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