The Returns At ShinyoungwacoalInc (KRX:005800) Provide Us With Signs Of What's To Come

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at ShinyoungwacoalInc (KRX:005800) and its ROCE trend, we weren't exactly thrilled.

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 ShinyoungwacoalInc:

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

0.015 = ₩4.7b ÷ (₩365b - ₩42b) (Based on the trailing twelve months to September 2020).

So, ShinyoungwacoalInc has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 7.4%.

See our latest analysis for ShinyoungwacoalInc

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

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at ShinyoungwacoalInc, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if ShinyoungwacoalInc doesn't end up being a multi-bagger in a few years time.

The Bottom Line On ShinyoungwacoalInc's ROCE

In summary, ShinyoungwacoalInc isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors appear hesitant that the trends will pick up because the stock has fallen 41% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

ShinyoungwacoalInc does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

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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