Will the Promising Trends At Daewon (KOSDAQ:007680) Continue?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Daewon (KOSDAQ:007680) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Daewon:

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

0.013 = ₩5.3b ÷ (₩539b - ₩135b) (Based on the trailing twelve months to September 2020).

So, Daewon has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 9.4%.

Check out our latest analysis for Daewon

Above you can see how the current ROCE for Daewon compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Daewon here for free.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 1.3%. The amount of capital employed has increased too, by 57%. So we're very much inspired by what we're seeing at Daewon thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 25%, which basically reduces it's funding from the likes of short-term creditors or suppliers. 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.

Our Take On Daewon's ROCE

All in all, it's terrific to see that Daewon is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 26% in the last three years. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 5 warning signs for Daewon you'll probably want to know about.

While Daewon 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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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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