CHOSUN WELDING POHANG (KRX:120030) Will Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 CHOSUN WELDING POHANG (KRX:120030) 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. Analysts use this formula to calculate it for CHOSUN WELDING POHANG:

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

0.11 = ₩13b ÷ (₩126b - ₩7.8b) (Based on the trailing twelve months to December 2020).

So, CHOSUN WELDING POHANG has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 4.8% generated by the Metals and Mining industry.

View our latest analysis for CHOSUN WELDING POHANG

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 CHOSUN WELDING POHANG's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For CHOSUN WELDING POHANG Tell Us?

On the surface, the trend of ROCE at CHOSUN WELDING POHANG doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. However it looks like CHOSUN WELDING POHANG 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by CHOSUN WELDING POHANG's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 87% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 1 warning sign facing CHOSUN WELDING POHANG that you might find interesting.

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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