Returns On Capital Are Showing Encouraging Signs At Ko Yo Chemical (Group) (HKG:827)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Ko Yo Chemical (Group) (HKG:827) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Ko Yo Chemical (Group), this is the formula:

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

0.086 = CN¥201m ÷ (CN¥5.7b - CN¥3.4b) (Based on the trailing twelve months to June 2023).

So, Ko Yo Chemical (Group) has an ROCE of 8.6%. Even though it's in line with the industry average of 9.3%, it's still a low return by itself.

View our latest analysis for Ko Yo Chemical (Group)

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 want to delve into the historical earnings, revenue and cash flow of Ko Yo Chemical (Group), check out these free graphs here.

What Can We Tell From Ko Yo Chemical (Group)'s ROCE Trend?

Ko Yo Chemical (Group) has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 8.6% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Ko Yo Chemical (Group) is utilizing 41% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, Ko Yo Chemical (Group)'s current liabilities are still rather high at 59% of total assets. 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.

Our Take On Ko Yo Chemical (Group)'s ROCE

Long story short, we're delighted to see that Ko Yo Chemical (Group)'s reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 60% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Ko Yo Chemical (Group) does have some risks though, and we've spotted 1 warning sign for Ko Yo Chemical (Group) that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.