- South Korea
- /
- Metals and Mining
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- KOSE:A005810
Returns On Capital At Poongsan Holdings (KRX:005810) Paint A Concerning Picture
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Poongsan Holdings (KRX:005810) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
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 Poongsan Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = ₩9.4b ÷ (₩975b - ₩198b) (Based on the trailing twelve months to December 2020).
Therefore, Poongsan Holdings has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 4.7%.
View our latest analysis for Poongsan Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Poongsan Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Poongsan Holdings, check out these free graphs here.
The Trend Of ROCE
When we looked at the ROCE trend at Poongsan Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 5.7%, but since then they've fallen to 1.2%. 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 may take some time before the company starts to see any change in earnings from these investments.
On a side note, Poongsan Holdings' current liabilities have increased over the last five years to 20% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.2%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by Poongsan Holdings' reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you want to know some of the risks facing Poongsan Holdings we've found 5 warning signs (1 is concerning!) that you should be aware of before investing here.
While Poongsan Holdings 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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About KOSE:A005810
Poongsan Holdings
Manufactures and sells copper and nonferrous metal products worldwide.
Flawless balance sheet with solid track record.