Be Wary Of Dong In Entech (KRX:111380) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Dong In Entech (KRX:111380) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Our free stock report includes 2 warning signs investors should be aware of before investing in Dong In Entech. Read for free now.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Dong In Entech:

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

0.11 = ₩21b ÷ (₩292b - ₩106b) (Based on the trailing twelve months to December 2024).

Thus, Dong In Entech has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Leisure industry average of 6.7% it's much better.

View our latest analysis for Dong In Entech

In the above chart we have measured Dong In Entech's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Dong In Entech .

So How Is Dong In Entech's ROCE Trending?

In terms of Dong In Entech's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 34% five years ago. However it looks like Dong In Entech 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 related note, Dong In Entech has decreased its current liabilities to 36% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Dong In Entech's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 35% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Dong In Entech has the makings of a multi-bagger.

On a final note, we've found 2 warning signs for Dong In Entech that we think you should be aware of.

While Dong In Entech 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.