We Like These Underlying Trends At Dongkuk Steel Mill (KRX:001230)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Dongkuk Steel Mill's (KRX:001230) returns on capital, so let's have a look.

Understanding 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. To calculate this metric for Dongkuk Steel Mill, this is the formula:

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

0.083 = ₩216b ÷ (₩5.3t - ₩2.7t) (Based on the trailing twelve months to September 2020).

Thus, Dongkuk Steel Mill has an ROCE of 8.3%. On its own that's a low return, but compared to the average of 4.1% generated by the Metals and Mining industry, it's much better.

Check out our latest analysis for Dongkuk Steel Mill

In the above chart we have measured Dongkuk Steel Mill's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Dongkuk Steel Mill.

What The Trend Of ROCE Can Tell Us

Dongkuk Steel Mill has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 380%. The company is now earning ₩0.08 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 28% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

Another thing to note, Dongkuk Steel Mill has a high ratio of current liabilities to total assets of 51%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In the end, Dongkuk Steel Mill has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a solid 57% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Dongkuk Steel Mill looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether A001230 is currently trading for a fair price.

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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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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