Is Daehan Synthetic Fiber (KRX:003830) A Future Multi-bagger?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Daehan Synthetic Fiber's (KRX:003830) returns on capital, so let's have a look.

What is 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 Daehan Synthetic Fiber is:

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

0.006 = ₩3.8b ÷ (₩642b - ₩13b) (Based on the trailing twelve months to September 2020).

Thus, Daehan Synthetic Fiber has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Luxury industry average of 7.4%.

Check out our latest analysis for Daehan Synthetic Fiber

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

So How Is Daehan Synthetic Fiber's ROCE Trending?

We're delighted to see that Daehan Synthetic Fiber is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 0.6% which is a sight for sore eyes. Not only that, but the company is utilizing 40% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 2.1%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Daehan Synthetic Fiber's ROCE

Long story short, we're delighted to see that Daehan Synthetic Fiber's reinvestment activities have paid off and the company is now profitable. Since the stock has only returned 4.4% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing to note, we've identified 1 warning sign with Daehan Synthetic Fiber and understanding this should be part of your investment process.

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.

If you’re looking to trade Daehan Synthetic Fiber, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.