Should We Be Excited About The Trends Of Returns At Samick Musical Instruments (KRX:002450)?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Samick Musical Instruments (KRX:002450), we don't think it's current trends fit the mold of a multi-bagger.

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 Samick Musical Instruments is:

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).

So, Samick Musical Instruments has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Leisure industry average of 8.0%.

See our latest analysis for Samick Musical Instruments

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Samick Musical Instruments has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Samick Musical Instruments' ROCE Trending?

In terms of Samick Musical Instruments' historical ROCE trend, it doesn't exactly demand attention. 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. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up 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.

Our Take On Samick Musical Instruments' ROCE

In conclusion, Samick Musical Instruments has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 54% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Samick Musical Instruments does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Samick Musical Instruments 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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