Will Dongsung FineTec's (KOSDAQ:033500) Growth In ROCE Persist?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, we've noticed some promising trends at Dongsung FineTec (KOSDAQ:033500) so let's look a bit deeper.

What is 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. Analysts use this formula to calculate it for Dongsung FineTec:

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

0.19 = ₩28b ÷ (₩293b - ₩143b) (Based on the trailing twelve months to June 2020).

Thus, Dongsung FineTec has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Chemicals 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 here for free.

What Can We Tell From Dongsung FineTec's ROCE Trend?

Dongsung FineTec's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 29% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Dongsung FineTec's current liabilities are still rather high at 49% 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.

What We Can Learn From Dongsung FineTec's ROCE

In summary, we're delighted to see that Dongsung FineTec has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Dongsung FineTec does have some risks though, and we've spotted 3 warning signs for Dongsung FineTec that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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