Investors Could Be Concerned With Zungwon En-Sys' (KOSDAQ:045510) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Zungwon En-Sys (KOSDAQ:045510) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Zungwon En-Sys, this is the formula:

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

0.026 = ₩1.1b ÷ (₩82b - ₩38b) (Based on the trailing twelve months to December 2020).

So, Zungwon En-Sys has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the IT industry average of 10%.

See our latest analysis for Zungwon En-Sys

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zungwon En-Sys' ROCE against it's prior returns. If you'd like to look at how Zungwon En-Sys has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Zungwon En-Sys' ROCE Trend?

In terms of Zungwon En-Sys' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 2.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Zungwon En-Sys has done well to pay down its current liabilities to 46% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 46% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Zungwon En-Sys' ROCE

In summary, Zungwon En-Sys is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 37% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zungwon En-Sys (of which 1 is potentially serious!) that you should know about.

While Zungwon En-Sys may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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