We're Watching These Trends At Busan Industrial (KRX:011390)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Busan Industrial (KRX:011390), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Busan Industrial, this is the formula:

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

0.065 = ₩5.8b ÷ (₩129b - ₩40b) (Based on the trailing twelve months to September 2020).

So, Busan Industrial has an ROCE of 6.5%. On its own that's a low return, but compared to the average of 3.8% generated by the Basic Materials industry, it's much better.

See our latest analysis for Busan Industrial

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

So How Is Busan Industrial's ROCE Trending?

On the surface, the trend of ROCE at Busan Industrial doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.5% from 14% five years ago. However it looks like Busan Industrial 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.

Our Take On Busan Industrial's ROCE

Bringing it all together, while we're somewhat encouraged by Busan Industrial's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 283% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Busan Industrial does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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