Has SCD (KOSDAQ:042110) Got What It Takes To Become A Multi-Bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at SCD (KOSDAQ:042110) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on SCD is:

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

0.02 = ₩2.2b ÷ (₩153b - ₩43b) (Based on the trailing twelve months to September 2020).

Thus, SCD has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.8%.

See our latest analysis for SCD

Historical performance is a great place to start when researching a stock so above you can see the gauge for SCD's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of SCD, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at SCD, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like SCD 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, SCD's current liabilities have increased over the last five years to 28% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.0%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On SCD's ROCE

To conclude, we've found that SCD is reinvesting in the business, but returns have been falling. Since the stock has declined 21% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about SCD, we've spotted 4 warning signs, and 1 of them is significant.

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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