Will The ROCE Trend At Dongkuk Refractories & Steel (KOSDAQ:075970) Continue?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Dongkuk Refractories & Steel (KOSDAQ:075970) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Dongkuk Refractories & Steel:

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

0.038 = ₩3.7b ÷ (₩126b - ₩30b) (Based on the trailing twelve months to September 2020).

Thus, Dongkuk Refractories & Steel has an ROCE of 3.8%. Even though it's in line with the industry average of 4.0%, it's still a low return by itself.

Check out our latest analysis for Dongkuk Refractories & Steel

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dongkuk Refractories & Steel's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Dongkuk Refractories & Steel, check out these free graphs here.

So How Is Dongkuk Refractories & Steel's ROCE Trending?

While there are companies with higher returns on capital out there, we still find the trend at Dongkuk Refractories & Steel promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 778% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

One more thing to note, Dongkuk Refractories & Steel has decreased current liabilities to 24% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

As discussed above, Dongkuk Refractories & Steel appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 108% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Dongkuk Refractories & Steel does have some risks though, and we've spotted 2 warning signs for Dongkuk Refractories & Steel that you might be interested in.

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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