Sungmoon Electronics (KRX:014910) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at Sungmoon Electronics (KRX:014910) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 Sungmoon Electronics, this is the formula:

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

0.024 = ₩1.1b ÷ (₩67b - ₩19b) (Based on the trailing twelve months to September 2024).

Therefore, Sungmoon Electronics has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.4%.

See our latest analysis for Sungmoon Electronics

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sungmoon Electronics.

What The Trend Of ROCE Can Tell Us

The fact that Sungmoon Electronics is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 2.4% on its capital. In addition to that, Sungmoon Electronics is employing 54% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

Long story short, we're delighted to see that Sungmoon Electronics' reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 45% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Sungmoon Electronics does have some risks, we noticed 3 warning signs (and 2 which are concerning) 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.