What are the early trends we should look for to identify a stock that could 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Dongwon F&B (KRX:049770) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What is Return On Capital Employed (ROCE)?
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 Dongwon F&B, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = ₩113b ÷ (₩1.8t - ₩638b) (Based on the trailing twelve months to September 2020).
Therefore, Dongwon F&B has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Food industry average of 6.9%.
See our latest analysis for Dongwon F&B
Above you can see how the current ROCE for Dongwon F&B compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Dongwon F&B, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.5% from 12% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From Dongwon F&B's ROCE
Bringing it all together, while we're somewhat encouraged by Dongwon F&B's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 49% in the last five years. Therefore based on the analysis done in this article, we don't think Dongwon F&B has the makings of a multi-bagger.
On a separate note, we've found 1 warning sign for Dongwon F&B you'll probably want to know about.
While Dongwon F&B isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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About KOSE:A049770
Undervalued with excellent balance sheet.
