Our Take On The Returns On Capital At Dk TechLtd (KOSDAQ:290550)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So while Dk TechLtd (KOSDAQ:290550) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. To calculate this metric for Dk TechLtd, this is the formula:

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

0.23 = ₩15b ÷ (₩114b - ₩51b) (Based on the trailing twelve months to March 2020).

Therefore, Dk TechLtd has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 5.6% earned by companies in a similar industry.

View our latest analysis for Dk TechLtd

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

So How Is Dk TechLtd's ROCE Trending?

We weren't thrilled with the trend because Dk TechLtd's ROCE has reduced by 39% over the last three years, while the business employed 352% more capital. Usually this isn't ideal, but given Dk TechLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Dk TechLtd might not have received a full period of earnings contribution from it.

On a related note, Dk TechLtd has decreased its current liabilities to 45% 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. 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. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Dk TechLtd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Dk TechLtd is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 77% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

Dk TechLtd does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are potentially serious...

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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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