There Are Reasons To Feel Uneasy About KEPCO Plant Service & EngineeringLtd's (KRX:051600) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at KEPCO Plant Service & EngineeringLtd (KRX:051600), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for KEPCO Plant Service & EngineeringLtd:

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

0.12 = ₩135b ÷ (₩1.3t - ₩256b) (Based on the trailing twelve months to December 2020).

Therefore, KEPCO Plant Service & EngineeringLtd has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Commercial Services industry.

View our latest analysis for KEPCO Plant Service & EngineeringLtd

In the above chart we have measured KEPCO Plant Service & EngineeringLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering KEPCO Plant Service & EngineeringLtd here for free.

What Does the ROCE Trend For KEPCO Plant Service & EngineeringLtd Tell Us?

On the surface, the trend of ROCE at KEPCO Plant Service & EngineeringLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 21% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, KEPCO Plant Service & EngineeringLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 47% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching KEPCO Plant Service & EngineeringLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While KEPCO Plant Service & EngineeringLtd 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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