Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Dongwon Systems (KRX:014820), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Dongwon Systems is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = ₩87b ÷ (₩1.3t - ₩357b) (Based on the trailing twelve months to September 2020).
Thus, Dongwon Systems has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Packaging industry average of 5.1%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Dongwon Systems' past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
There hasn't been much to report for Dongwon Systems' returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Dongwon Systems in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
The Bottom Line
We can conclude that in regards to Dongwon Systems' returns on capital employed and the trends, there isn't much change to report on. And investors appear hesitant that the trends will pick up because the stock has fallen 36% in the last five years. Therefore based on the analysis done in this article, we don't think Dongwon Systems has the makings of a multi-bagger.
On a final note, we've found 3 warning signs for Dongwon Systems that we think you should be aware of.
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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