Is There More Growth In Store For SG ChoongbangLtd's (KRX:001380) Returns On Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at SG ChoongbangLtd (KRX:001380) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on SG ChoongbangLtd is:

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

0.0024 = ₩353m ÷ (₩197b - ₩53b) (Based on the trailing twelve months to June 2020).

Therefore, SG ChoongbangLtd has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 6.8%.

Check out our latest analysis for SG ChoongbangLtd

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

The Trend Of ROCE

Shareholders will be relieved that SG ChoongbangLtd has broken into profitability. The company now earns 0.2% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

The Bottom Line On SG ChoongbangLtd's ROCE

As discussed above, SG ChoongbangLtd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 28% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, SG ChoongbangLtd does come with some risks, and we've found 3 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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