If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating DREAMTECH (KRX:192650), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for DREAMTECH, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = ₩13b ÷ (₩582b - ₩286b) (Based on the trailing twelve months to June 2020).
So, DREAMTECH has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 6.3%.
Above you can see how the current ROCE for DREAMTECH compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for DREAMTECH.
How Are Returns Trending?
We weren't thrilled with the trend because DREAMTECH's ROCE has reduced by 71% over the last one year, while the business employed 31% more capital. Usually this isn't ideal, but given DREAMTECH conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with DREAMTECH's earnings and if they change as a result from the capital raise.On a side note, DREAMTECH's current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From DREAMTECH's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for DREAMTECH. And the stock has done incredibly well with a 120% return over the last year, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
If you want to know some of the risks facing DREAMTECH we've found 5 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
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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DREAMTECH Co., Ltd. designs, develops, produces, and sells modules for smartphone, automotive LED, home appliance, fingerprint, sensor, IT convergence, and medical/ healthcare applications in South Korea and internationally.
Excellent balance sheet and good value.
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