Will The ROCE Trend At Samwha ElectricLtd (KRX:009470) Continue?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Samwha ElectricLtd (KRX:009470) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Samwha ElectricLtd:

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

0.019 = ₩1.5b ÷ (₩137b - ₩54b) (Based on the trailing twelve months to September 2020).

Thus, Samwha ElectricLtd has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.6%.

See our latest analysis for Samwha ElectricLtd

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

So How Is Samwha ElectricLtd's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 1.9%. The amount of capital employed has increased too, by 46%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a related note, the company's ratio of current liabilities to total assets has decreased to 40%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Samwha ElectricLtd has. And a remarkable 476% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Samwha ElectricLtd, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Samwha ElectricLtd 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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