There Are Reasons To Feel Uneasy About PN Poong Nyun's (KOSDAQ:024940) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at PN Poong Nyun (KOSDAQ:024940) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 PN Poong Nyun:

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

0.024 = ₩982m ÷ (₩50b - ₩8.9b) (Based on the trailing twelve months to September 2020).

Therefore, PN Poong Nyun has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.8%.

View our latest analysis for PN Poong Nyun

Historical performance is a great place to start when researching a stock so above you can see the gauge for PN Poong Nyun's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of PN Poong Nyun, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at PN Poong Nyun doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.4% from 8.6% five years ago. 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.

On a related note, PN Poong Nyun has decreased its current liabilities to 18% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, PN Poong Nyun is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 158% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 4 warning signs for PN Poong Nyun that we think you should be aware of.

While PN Poong Nyun 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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