These Return Metrics Don't Make Lion Chemtech (KOSDAQ:171120) Look Too Strong

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Lion Chemtech (KOSDAQ:171120) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Lion Chemtech is:

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

0.055 = ₩7.0b ÷ (₩153b - ₩25b) (Based on the trailing twelve months to September 2024).

Thus, Lion Chemtech has an ROCE of 5.5%. On its own, that's a low figure but it's around the 5.6% average generated by the Building industry.

Check out our latest analysis for Lion Chemtech

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 Lion Chemtech has performed in the past in other metrics, you can view this free graph of Lion Chemtech's past earnings, revenue and cash flow.

The Trend Of ROCE

There is reason to be cautious about Lion Chemtech, given the returns are trending downwards. To be more specific, the ROCE was 8.7% two years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last two years. If these trends continue, we wouldn't expect Lion Chemtech to turn into a multi-bagger.

The Bottom Line On Lion Chemtech's ROCE

In summary, it's unfortunate that Lion Chemtech is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 28% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 5 warning signs we've spotted with Lion Chemtech (including 1 which doesn't sit too well with us) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.