We Like These Underlying Trends At Daesung Energy (KRX:117580)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. So on that note, Daesung Energy (KRX:117580) looks quite promising in regards to its trends of return on capital.

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 Daesung Energy:

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

0.055 = ₩23b ÷ (₩588b - ₩165b) (Based on the trailing twelve months to September 2020).

Thus, Daesung Energy has an ROCE of 5.5%. On its own that's a low return, but compared to the average of 3.7% generated by the Gas Utilities industry, it's much better.

See our latest analysis for Daesung Energy

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Daesung Energy's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Daesung Energy has not disappointed with their ROCE growth. The figures show that over the last two years, ROCE has grown 47% whilst employing roughly the same amount of capital. 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. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Daesung Energy's ROCE

As discussed above, Daesung Energy appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 6.3% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you'd like to know more about Daesung Energy, we've spotted 2 warning signs, and 1 of them is significant.

While Daesung Energy 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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