Returns On Capital Are A Standout For Ko Yo Chemical (Group) (HKG:827)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 when we looked at the ROCE trend of Ko Yo Chemical (Group) (HKG:827) we really liked what we saw.

What Is 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 Ko Yo Chemical (Group):

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

0.31 = CN¥694m ÷ (CN¥4.2b - CN¥2.0b) (Based on the trailing twelve months to June 2022).

So, Ko Yo Chemical (Group) has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 13%.

Our analysis indicates that 827 is potentially undervalued!

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

How Are Returns Trending?

Shareholders will be relieved that Ko Yo Chemical (Group) has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 31%, which is always encouraging. While returns have increased, the amount of capital employed by Ko Yo Chemical (Group) has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a separate but related note, it's important to know that Ko Yo Chemical (Group) has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

As discussed above, Ko Yo Chemical (Group) appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Considering the stock has delivered 16% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

On a final note, we've found 2 warning signs for Ko Yo Chemical (Group) that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.