Samsung SDI (KRX:006400) Might Have The Makings Of A Multi-Bagger

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Samsung SDI's (KRX:006400) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Samsung SDI:

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

0.041 = ₩671b ÷ (₩22t - ₩5.0t) (Based on the trailing twelve months to December 2020).

Thus, Samsung SDI has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.6%.

Check out our latest analysis for Samsung SDI

In the above chart we have measured Samsung SDI's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Samsung SDI has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 4.1% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Samsung SDI is utilizing 27% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line

Long story short, we're delighted to see that Samsung SDI's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 538% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Samsung SDI can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Samsung SDI that we think you should be aware of.

While Samsung SDI 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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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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