Capital Allocation Trends At Doosan Fuel Cell (KRX:336260) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at Doosan Fuel Cell (KRX:336260) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. To calculate this metric for Doosan Fuel Cell, this is the formula:

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

0.046 = ₩24b ÷ (₩790b - ₩265b) (Based on the trailing twelve months to December 2020).

Therefore, Doosan Fuel Cell has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.8%.

Check out our latest analysis for Doosan Fuel Cell

Above you can see how the current ROCE for Doosan Fuel Cell 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

When we looked at the ROCE trend at Doosan Fuel Cell, we didn't gain much confidence. To be more specific, ROCE has fallen from 29% over the last one year. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Doosan Fuel Cell has decreased its current liabilities to 33% of total assets. That could partly explain why the ROCE has dropped. 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.

In Conclusion...

We're a bit apprehensive about Doosan Fuel Cell because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 888% over the last year, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing: We've identified 2 warning signs with Doosan Fuel Cell (at least 1 which is significant) , and understanding them would certainly be useful.

While Doosan Fuel Cell 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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