Here's What's Concerning About Dongjin Semichem's (KOSDAQ:005290) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Dongjin Semichem (KOSDAQ:005290), it didn't seem to tick all of these boxes.

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Understanding 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 Dongjin Semichem, this is the formula:

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

0.16 = ₩202b ÷ (₩2.0t - ₩723b) (Based on the trailing twelve months to December 2024).

So, Dongjin Semichem has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Chemicals industry.

View our latest analysis for Dongjin Semichem

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'd like to look at how Dongjin Semichem has performed in the past in other metrics, you can view this free graph of Dongjin Semichem's past earnings, revenue and cash flow .

So How Is Dongjin Semichem's ROCE Trending?

When we looked at the ROCE trend at Dongjin Semichem, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 16% from 26% five years ago. However it looks like Dongjin Semichem 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, Dongjin Semichem has decreased its current liabilities to 36% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Dongjin Semichem's ROCE

Bringing it all together, while we're somewhat encouraged by Dongjin Semichem's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 99% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Dongjin Semichem could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for A005290 on our platform quite valuable.

While Dongjin Semichem 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.