There Are Reasons To Feel Uneasy About Samsung Electronics' (KRX:005930) Returns On Capital

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Samsung Electronics (KRX:005930) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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 Samsung Electronics is:

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

0.056 = ₩22t ÷ (₩486t - ₩84t) (Based on the trailing twelve months to June 2024).

Thus, Samsung Electronics has an ROCE of 5.6%. Even though it's in line with the industry average of 5.6%, it's still a low return by itself.

Check out our latest analysis for Samsung Electronics

Above you can see how the current ROCE for Samsung Electronics compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Samsung Electronics .

What Does the ROCE Trend For Samsung Electronics Tell Us?

When we looked at the ROCE trend at Samsung Electronics, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.6% from 15% five years ago. However it looks like Samsung Electronics might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

Our Take On Samsung Electronics' ROCE

To conclude, we've found that Samsung Electronics is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 28% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.