Here's What To Make Of Shinsung Tongsang's (KRX:005390) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at Shinsung Tongsang (KRX:005390), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Shinsung Tongsang:

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

0.08 = ₩35b ÷ (₩855b - ₩416b) (Based on the trailing twelve months to December 2020).

So, Shinsung Tongsang has an ROCE of 8.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.7%.

See our latest analysis for Shinsung Tongsang

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Shinsung Tongsang, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a separate but related note, it's important to know that Shinsung Tongsang has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Shinsung Tongsang's ROCE

In summary, Shinsung Tongsang is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 12% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Shinsung Tongsang does have some risks though, and we've spotted 1 warning sign for Shinsung Tongsang that you might be interested in.

While Shinsung Tongsang may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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