We're Watching These Trends At Sangshin Electronics (KOSDAQ:263810)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Sangshin Electronics (KOSDAQ:263810), it didn't seem to tick all of these boxes.

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

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 Sangshin Electronics is:

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

0.066 = ₩2.5b ÷ (₩59b - ₩21b) (Based on the trailing twelve months to September 2020).

Therefore, Sangshin Electronics has an ROCE of 6.6%. On its own, that's a low figure but it's around the 5.6% average generated by the Electronic industry.

Check out our latest analysis for Sangshin Electronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sangshin Electronics' ROCE against it's prior returns. If you're interested in investigating Sangshin Electronics' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Sangshin Electronics Tell Us?

In terms of Sangshin Electronics' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 31% over the last four years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 related note, Sangshin Electronics has decreased its current liabilities to 36% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

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 14% 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.

Sangshin Electronics does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Sangshin Electronics isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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