Is SAMICK MUSICAL INSTRUMENT (KRX:002450) Likely To Turn Things Around?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think SAMICK MUSICAL INSTRUMENT (KRX:002450) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for SAMICK MUSICAL INSTRUMENT, this is the formula:

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

0.051 = ₩20b ÷ (₩634b - ₩243b) (Based on the trailing twelve months to September 2020).

Thus, SAMICK MUSICAL INSTRUMENT has an ROCE of 5.1%. In absolute terms, that's a low return but it's around the Leisure industry average of 5.8%.

See our latest analysis for SAMICK MUSICAL INSTRUMENT

Historical performance is a great place to start when researching a stock so above you can see the gauge for SAMICK MUSICAL INSTRUMENT's ROCE against it's prior returns. If you're interested in investigating SAMICK MUSICAL INSTRUMENT's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The returns on capital haven't changed much for SAMICK MUSICAL INSTRUMENT in recent years. Over the past five years, ROCE has remained relatively flat at around 5.1% and the business has deployed 31% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 38% of total assets, this reported ROCE would probably be less than5.1% because total capital employed would be higher.The 5.1% ROCE could be even lower if current liabilities weren't 38% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

What We Can Learn From SAMICK MUSICAL INSTRUMENT's ROCE

Long story short, while SAMICK MUSICAL INSTRUMENT has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 37% 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.

On a final note, we found 4 warning signs for SAMICK MUSICAL INSTRUMENT (1 can't be ignored) 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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