What We Make Of Samsung Electro-Mechanics' (KRX:009150) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Samsung Electro-Mechanics' (KRX:009150) returns on capital, so let's have a look.

What is 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 Electro-Mechanics:

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

0.098 = ₩702b ÷ (₩9.2t - ₩2.1t) (Based on the trailing twelve months to September 2020).

Thus, Samsung Electro-Mechanics has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.6%.

Check out our latest analysis for Samsung Electro-Mechanics

In the above chart we have measured Samsung Electro-Mechanics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Samsung Electro-Mechanics here for free.

The Trend Of ROCE

Samsung Electro-Mechanics has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 81% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From Samsung Electro-Mechanics' ROCE

In summary, we're delighted to see that Samsung Electro-Mechanics has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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

While Samsung Electro-Mechanics isn't earning the highest return, check out this free list of companies that are 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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