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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Dong Yang Piston (KRX:092780) and its ROCE trend, we weren’t exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Dong Yang Piston is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.054 = ₩8.8b ÷ (₩346b – ₩181b) (Based on the trailing twelve months to September 2020).
Therefore, Dong Yang Piston has an ROCE of 5.4%. In absolute terms, that’s a low return, but it’s much better than the Auto Components industry average of 4.1%.
View our latest analysis for Dong Yang Piston
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’d like to look at how Dong Yang Piston has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Dong Yang Piston Tell Us?
On the surface, the trend of ROCE at Dong Yang Piston doesn’t inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
Another thing to note, Dong Yang Piston has a high ratio of current liabilities to total assets of 52%. 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.
The Bottom Line On Dong Yang Piston’s ROCE
In summary, Dong Yang Piston is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. Since the stock has gained an impressive 53% over the last three years, investors must think there’s better things to come. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
Dong Yang Piston does have some risks, we noticed 4 warning signs (and 2 which don’t sit too well with us) we think you should know about.
While Dong Yang Piston 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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