What Do The Returns On Capital At Sambo Industrial (KOSDAQ:009620) Tell Us?

What trends should we look for it we want to identify stocks that can 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Sambo Industrial (KOSDAQ:009620) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Sambo Industrial is:

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

0.063 = ₩7.4b ÷ (₩298b - ₩182b) (Based on the trailing twelve months to September 2020).

Therefore, Sambo Industrial has an ROCE of 6.3%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 4.1%.

See our latest analysis for Sambo Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sambo Industrial's ROCE against it's prior returns. If you'd like to look at how Sambo Industrial has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Sambo Industrial's ROCE has reduced by 36% over the last five years, while the business employed 34% more capital. Usually this isn't ideal, but given Sambo Industrial conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Sambo Industrial probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Sambo Industrial's current liabilities are still rather high at 61% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

To conclude, we've found that Sambo Industrial is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 9.7% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Sambo Industrial (of which 1 is a bit unpleasant!) that you should know about.

While Sambo Industrial 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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