Capital Allocation Trends At Taewoong Logistics (KOSDAQ:124560) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Taewoong Logistics (KOSDAQ:124560), it didn't seem to tick all of these boxes.

What Is 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 Taewoong Logistics, this is the formula:

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

0.14 = ₩44b ÷ (₩501b - ₩187b) (Based on the trailing twelve months to September 2024).

Thus, Taewoong Logistics has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Shipping industry average of 7.7% it's much better.

Check out our latest analysis for Taewoong Logistics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Taewoong Logistics' ROCE against it's prior returns. If you're interested in investigating Taewoong Logistics' past further, check out this free graph covering Taewoong Logistics' past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Taewoong Logistics doesn't inspire confidence. Around five years ago the returns on capital were 47%, but since then they've fallen to 14%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Taewoong Logistics has decreased its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Taewoong Logistics. These trends are starting to be recognized by investors since the stock has delivered a 24% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing to note, we've identified 2 warning signs with Taewoong Logistics and understanding these should be part of your investment process.

While Taewoong Logistics 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. 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.