Investors Will Want Daejoo Electronic Materials' (KOSDAQ:078600) Growth In ROCE To Persist

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at Daejoo Electronic Materials (KOSDAQ:078600) and its trend of ROCE, we really liked what we saw.

Understanding 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. The formula for this calculation on Daejoo Electronic Materials is:

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

0.064 = ₩9.0b ÷ (₩206b - ₩65b) (Based on the trailing twelve months to December 2020).

So, Daejoo Electronic Materials has an ROCE of 6.4%. Even though it's in line with the industry average of 5.9%, it's still a low return by itself.

Check out our latest analysis for Daejoo Electronic Materials

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 Daejoo Electronic Materials, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

The fact that Daejoo Electronic Materials is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 6.4% on its capital. Not only that, but the company is utilizing 71% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On Daejoo Electronic Materials' ROCE

To the delight of most shareholders, Daejoo Electronic Materials has now broken into profitability. And a remarkable 1,064% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Daejoo Electronic Materials can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 3 warning signs with Daejoo Electronic Materials (at least 1 which is potentially serious) , and understanding these would certainly be useful.

While Daejoo Electronic Materials 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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