The Trends At Dongil Metal (KOSDAQ:109860) That You Should Know About

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Dongil Metal (KOSDAQ:109860) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Dongil Metal:

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

0.041 = ₩5.4b ÷ (₩142b - ₩11b) (Based on the trailing twelve months to September 2020).

Thus, Dongil Metal has an ROCE of 4.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.1%.

View our latest analysis for Dongil Metal

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

The Trend Of ROCE

When we looked at the ROCE trend at Dongil Metal, we didn't gain much confidence. Around five years ago the returns on capital were 6.4%, but since then they've fallen to 4.1%. 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.

What We Can Learn From Dongil Metal's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Dongil Metal have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 59% return 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.

On a final note, we've found 1 warning sign for Dongil Metal that we think you should be aware of.

While Dongil Metal 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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