Stock Analysis

We Like These Underlying Return On Capital Trends At Daedong Steel (KOSDAQ:048470)

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KOSDAQ:A048470
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. With that in mind, we've noticed some promising trends at Daedong Steel (KOSDAQ:048470) so let's look a bit deeper.

Understanding 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 Daedong Steel:

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

0.016 = ₩1.0b ÷ (₩80b - ₩17b) (Based on the trailing twelve months to December 2020).

Thus, Daedong Steel has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 4.7%.

View our latest analysis for Daedong Steel

roce
KOSDAQ:A048470 Return on Capital Employed April 19th 2021

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

The Trend Of ROCE

We're delighted to see that Daedong Steel is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 1.6% on its capital. Not only that, but the company is utilizing 21% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 21% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Daedong Steel's ROCE

To the delight of most shareholders, Daedong Steel has now broken into profitability. And with a respectable 89% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Daedong Steel, you might be interested to know about the 3 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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About KOSDAQ:A048470

Daedong Steel

Daedong Steel Co., Ltd. manufactures and sells steel products.

Mediocre balance sheet and slightly overvalued.

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