Will Gyeongnam Steel (KOSDAQ:039240) Multiply In Value Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Gyeongnam Steel (KOSDAQ:039240) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Gyeongnam Steel:

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

0.049 = ₩4.5b ÷ (₩150b - ₩58b) (Based on the trailing twelve months to September 2020).

Thus, Gyeongnam Steel has an ROCE of 4.9%. On its own that's a low return, but compared to the average of 4.1% generated by the Metals and Mining industry, it's much better.

View our latest analysis for Gyeongnam Steel

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're interested in investigating Gyeongnam Steel's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Gyeongnam Steel Tell Us?

In terms of Gyeongnam Steel's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 15%, but since then they've fallen to 4.9%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Gyeongnam Steel have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 29% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Gyeongnam Steel does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

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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