What Do The Returns At Shinsung E&G (KRX:011930) Mean Going Forward?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Shinsung E&G's (KRX:011930) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shinsung E&G:

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

0.074 = ₩14b ÷ (₩450b - ₩257b) (Based on the trailing twelve months to September 2020).

Therefore, Shinsung E&G has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.8%.

See our latest analysis for Shinsung E&G

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, revenue and cash flow of Shinsung E&G, check out these free graphs here.

What Can We Tell From Shinsung E&G's ROCE Trend?

Shareholders will be relieved that Shinsung E&G has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 7.4% on its capital. While returns have increased, the amount of capital employed by Shinsung E&G has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Another thing to note, Shinsung E&G has a high ratio of current liabilities to total assets of 57%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, we're delighted to see that Shinsung E&G has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 90% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Shinsung E&G can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 4 warning signs we've spotted with Shinsung E&G (including 1 which is concerning) .

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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