Capital Allocation Trends At Samsung Electro-Mechanics (KRX:009150) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at Samsung Electro-Mechanics (KRX:009150) and its ROCE trend, we weren't exactly thrilled.

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

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 Electro-Mechanics is:

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

0.073 = ₩683b ÷ (₩13t - ₩3.4t) (Based on the trailing twelve months to June 2024).

So, Samsung Electro-Mechanics has an ROCE of 7.3%. Even though it's in line with the industry average of 6.9%, it's still a low return by itself.

See our latest analysis for Samsung Electro-Mechanics

Above you can see how the current ROCE for Samsung Electro-Mechanics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Samsung Electro-Mechanics for free.

What Does the ROCE Trend For Samsung Electro-Mechanics Tell Us?

When we looked at the ROCE trend at Samsung Electro-Mechanics, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 7.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Samsung Electro-Mechanics is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 17% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Samsung Electro-Mechanics could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for A009150 on our platform quite valuable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.