What Do The Returns On Capital At Young Poong Paper MfgLtd (KRX:006740) Tell Us?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at Young Poong Paper MfgLtd (KRX:006740) 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. To calculate this metric for Young Poong Paper MfgLtd, this is the formula:

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

0.065 = ₩11b ÷ (₩180b - ₩18b) (Based on the trailing twelve months to September 2020).

Thus, Young Poong Paper MfgLtd has an ROCE of 6.5%. In absolute terms, that's a low return, but it's much better than the Forestry industry average of 5.2%.

View our latest analysis for Young Poong Paper MfgLtd

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

What Can We Tell From Young Poong Paper MfgLtd's ROCE Trend?

On the surface, the trend of ROCE at Young Poong Paper MfgLtd doesn't inspire confidence. Over the last one year, returns on capital have decreased to 6.5% from 9.4% one year ago. However it looks like Young Poong Paper MfgLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Young Poong Paper MfgLtd's ROCE

To conclude, we've found that Young Poong Paper MfgLtd is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 235% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Young Poong Paper MfgLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

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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