PC Direct (KOSDAQ:051380) Might Have The Makings Of A Multi-Bagger

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. So when we looked at PC Direct (KOSDAQ:051380) and its trend of ROCE, we really liked what we saw.

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 PC Direct is:

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

0.16 = ₩6.9b ÷ (₩81b - ₩39b) (Based on the trailing twelve months to December 2020).

So, PC Direct has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.9% it's much better.

See our latest analysis for PC Direct

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

What The Trend Of ROCE Can Tell Us

The trends we've noticed at PC Direct are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 77%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, PC Direct's current liabilities are still rather high at 48% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To sum it up, PC Direct has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 135% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if PC Direct can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing PC Direct that you might find interesting.

While PC Direct 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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