There Are Reasons To Feel Uneasy About S&D's (KOSDAQ:260970) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating S&D (KOSDAQ:260970), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for S&D, this is the formula:

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

0.16 = ₩14b ÷ (₩112b - ₩22b) (Based on the trailing twelve months to March 2024).

Thus, S&D has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Chemicals industry.

See our latest analysis for S&D

In the above chart we have measured S&D's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for S&D .

How Are Returns Trending?

When we looked at the ROCE trend at S&D, we didn't gain much confidence. To be more specific, ROCE has fallen from 21% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On S&D's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for S&D. And long term investors must be optimistic going forward because the stock has returned a huge 412% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

S&D does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

While S&D may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com