These Trends Paint A Bright Future For Drgem (KOSDAQ:263690)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Drgem (KOSDAQ:263690) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Drgem, this is the formula:

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

0.40 = ₩23b ÷ (₩73b - ₩16b) (Based on the trailing twelve months to September 2020).

So, Drgem has an ROCE of 40%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 13%.

See our latest analysis for Drgem

Historical performance is a great place to start when researching a stock so above you can see the gauge for Drgem's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Drgem, check out these free graphs here.

What Can We Tell From Drgem's ROCE Trend?

Drgem is displaying some positive trends. The data shows that returns on capital have increased substantially over the last four years to 40%. Basically the business is earning more per dollar of capital invested and in addition to that, 376% more capital is being employed now too. So we're very much inspired by what we're seeing at Drgem thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 22%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Drgem's ROCE

All in all, it's terrific to see that Drgem is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last year, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Drgem, we've discovered 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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