Capital Allocation Trends At Gwangju Shinsegae (KRX:037710) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Gwangju Shinsegae (KRX:037710), we don't think it's current trends fit the mold of a multi-bagger.

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 Gwangju Shinsegae, this is the formula:

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

0.068 = ₩48b ÷ (₩784b - ₩71b) (Based on the trailing twelve months to December 2020).

Therefore, Gwangju Shinsegae has an ROCE of 6.8%. In absolute terms, that's a low return, but it's much better than the Multiline Retail industry average of 5.5%.

Check out our latest analysis for Gwangju Shinsegae

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'd like to look at how Gwangju Shinsegae has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Gwangju Shinsegae Tell Us?

On the surface, the trend of ROCE at Gwangju Shinsegae doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Gwangju Shinsegae 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.

On a side note, Gwangju Shinsegae has done well to pay down its current liabilities to 9.0% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Gwangju Shinsegae's ROCE

To conclude, we've found that Gwangju Shinsegae is reinvesting in the business, but returns have been falling. Since the stock has declined 28% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Gwangju Shinsegae has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with Gwangju Shinsegae and understanding it should be part of your investment process.

While Gwangju Shinsegae isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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