Samsung SDSLtd (KRX:018260) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Samsung SDSLtd (KRX:018260) and its ROCE trend, we weren't exactly thrilled.

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 Samsung SDSLtd, this is the formula:

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

0.083 = ₩854b ÷ (₩13t - ₩2.4t) (Based on the trailing twelve months to June 2024).

Therefore, Samsung SDSLtd has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the IT industry average of 7.2%.

View our latest analysis for Samsung SDSLtd

Above you can see how the current ROCE for Samsung SDSLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Samsung SDSLtd .

What Does the ROCE Trend For Samsung SDSLtd Tell Us?

On the surface, the trend of ROCE at Samsung SDSLtd doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 8.3%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Samsung SDSLtd's ROCE

In summary, we're somewhat concerned by Samsung SDSLtd's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 18% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Samsung SDSLtd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for A018260 on our platform quite valuable.

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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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.