What Do The Returns On Capital At Shinsung Tongsang (KRX:005390) Tell Us?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shinsung Tongsang (KRX:005390), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shinsung Tongsang, this is the formula:

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

0.056 = ₩23b ÷ (₩888b - ₩486b) (Based on the trailing twelve months to September 2020).

So, Shinsung Tongsang has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Luxury industry average of 6.8%.

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 want to delve into the historical earnings, revenue and cash flow of Shinsung Tongsang, check out these free graphs here.

What Can We Tell From Shinsung Tongsang's ROCE Trend?

On the surface, the trend of ROCE at Shinsung Tongsang doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 5.6%. However it looks like Shinsung Tongsang might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Shinsung Tongsang has a current liabilities to total assets ratio of 55%, 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

Bringing it all together, while we're somewhat encouraged by Shinsung Tongsang's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 9.0% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching Shinsung Tongsang, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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