Shinsung ST's (KOSDAQ:416180) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Shinsung ST (KOSDAQ:416180) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shinsung ST, this is the formula:

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

0.067 = ₩7.0b ÷ (₩143b - ₩38b) (Based on the trailing twelve months to September 2024).

Therefore, Shinsung ST has an ROCE of 6.7%. Even though it's in line with the industry average of 6.9%, it's still a low return by itself.

View our latest analysis for Shinsung ST

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

What The Trend Of ROCE Can Tell Us

We're delighted to see that Shinsung ST is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.7% on its capital. And unsurprisingly, like most companies trying to break into the black, Shinsung ST is utilizing 396% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 27%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Shinsung ST's ROCE

In summary, it's great to see that Shinsung ST has managed to break into profitability and is continuing to reinvest in its business. Given the stock has declined 21% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 2 warning signs for Shinsung ST you'll probably want to know about.

While Shinsung ST 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.