Sangshin Electronics (KOSDAQ:263810) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Sangshin Electronics (KOSDAQ:263810) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Sangshin Electronics is:

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

0.08 = ₩3.0b ÷ (₩61b - ₩23b) (Based on the trailing twelve months to December 2020).

Thus, Sangshin Electronics has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.6%.

See our latest analysis for Sangshin Electronics

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 Sangshin Electronics, check out these free graphs here.

What Can We Tell From Sangshin Electronics' ROCE Trend?

When we looked at the ROCE trend at Sangshin Electronics, we didn't gain much confidence. To be more specific, ROCE has fallen from 29% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Sangshin Electronics has done well to pay down its current liabilities to 38% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Sangshin Electronics' ROCE

To conclude, we've found that Sangshin Electronics is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 19% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Sangshin Electronics has the makings of a multi-bagger.

One final note, you should learn about the 2 warning signs we've spotted with Sangshin Electronics (including 1 which is a bit concerning) .

While Sangshin 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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