What Do The Returns On Capital At Dongyang S.TecLtd (KOSDAQ:060380) Tell Us?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Dongyang S.TecLtd (KOSDAQ:060380), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Dongyang S.TecLtd:

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

0.031 = ₩2.3b ÷ (₩128b - ₩55b) (Based on the trailing twelve months to September 2020).

Therefore, Dongyang S.TecLtd has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 4.1%.

View our latest analysis for Dongyang S.TecLtd

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

What Does the ROCE Trend For Dongyang S.TecLtd Tell Us?

On the surface, the trend of ROCE at Dongyang S.TecLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 5.1% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a separate but related note, it's important to know that Dongyang S.TecLtd has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

We're a bit apprehensive about Dongyang S.TecLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 113% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Dongyang S.TecLtd we've found 4 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Dongyang S.TecLtd 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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