Dongsung FineTec (KOSDAQ:033500) Is Very Good At Capital Allocation

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Dongsung FineTec (KOSDAQ:033500) we really liked what we saw.

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

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. The formula for this calculation on Dongsung FineTec is:

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

0.26 = ₩48b ÷ (₩371b - ₩188b) (Based on the trailing twelve months to June 2024).

Thus, Dongsung FineTec has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 7.3% earned by companies in a similar industry.

Check out our latest analysis for Dongsung FineTec

In the above chart we have measured Dongsung FineTec's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Dongsung FineTec for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Dongsung FineTec are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 26%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 68%. So we're very much inspired by what we're seeing at Dongsung FineTec thanks to its ability to profitably reinvest capital.

On a side note, Dongsung FineTec's current liabilities are still rather high at 51% 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.

Our Take On Dongsung FineTec's ROCE

All in all, it's terrific to see that Dongsung FineTec is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 51% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

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

Dongsung FineTec is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.