We're Watching These Trends At KEPCO Plant Service & EngineeringLtd (KRX:051600)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at KEPCO Plant Service & EngineeringLtd (KRX:051600) and its ROCE trend, we weren't exactly thrilled.

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

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. 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)

0.15 = ₩177b ÷ (₩1.4t - ₩185b) (Based on the trailing twelve months to September 2020).

Therefore, KEPCO Plant Service & EngineeringLtd has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 14% generated by the Commercial Services industry.

See 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at KEPCO Plant Service & EngineeringLtd doesn't inspire confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 15%. 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'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.

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. And investors appear hesitant that the trends will pick up because the stock has fallen 58% in the last five years. Therefore based on the analysis done in this article, we don't think KEPCO Plant Service & EngineeringLtd has the makings of a multi-bagger.

If you'd like to know about the risks facing KEPCO Plant Service & EngineeringLtd, we've discovered 1 warning sign that you should be aware of.

While KEPCO Plant Service & EngineeringLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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