Daejung Chemicals & Metals (KOSDAQ:120240) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Daejung Chemicals & Metals (KOSDAQ:120240) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. The formula for this calculation on Daejung Chemicals & Metals is:

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

0.053 = ₩9.2b ÷ (₩201b - ₩28b) (Based on the trailing twelve months to March 2024).

Thus, Daejung Chemicals & Metals has an ROCE of 5.3%. In absolute terms, that's a low return but it's around the Chemicals industry average of 6.6%.

See our latest analysis for Daejung Chemicals & Metals

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

The Trend Of ROCE

When we looked at the ROCE trend at Daejung Chemicals & Metals, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.9% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Daejung Chemicals & Metals' ROCE

Bringing it all together, while we're somewhat encouraged by Daejung Chemicals & Metals' reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 24% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we've found 2 warning signs for Daejung Chemicals & Metals that we think you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.