Our Take On The Returns On Capital At Derkwoo Electronics (KOSDAQ:263600)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Derkwoo Electronics (KOSDAQ:263600), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Derkwoo Electronics:

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

0.16 = ₩19b ÷ (₩158b - ₩39b) (Based on the trailing twelve months to September 2020).

So, Derkwoo Electronics has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Electronic industry.

Check out our latest analysis for Derkwoo Electronics

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

What Does the ROCE Trend For Derkwoo Electronics Tell Us?

When we looked at the ROCE trend at Derkwoo Electronics, we didn't gain much confidence. Around four years ago the returns on capital were 37%, but since then they've fallen to 16%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

While returns have fallen for Derkwoo Electronics in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 31% to shareholders over the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we found 4 warning signs for Derkwoo Electronics (2 are concerning) you should be aware of.

While Derkwoo Electronics 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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This article by Simply Wall St is general in nature. 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.
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