Be Wary Of Chosun RefractoriesLtd (KRX:000480) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Chosun RefractoriesLtd (KRX:000480) 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 Chosun RefractoriesLtd is:

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

0.027 = ₩23b ÷ (₩1.2t - ₩405b) (Based on the trailing twelve months to December 2020).

Thus, Chosun RefractoriesLtd has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Building industry average of 3.5%.

Check out our latest analysis for Chosun RefractoriesLtd

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 Chosun RefractoriesLtd's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Chosun RefractoriesLtd's ROCE Trending?

When we looked at the ROCE trend at Chosun RefractoriesLtd, we didn't gain much confidence. Around five years ago the returns on capital were 3.9%, but since then they've fallen to 2.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Chosun RefractoriesLtd's ROCE

In summary, Chosun RefractoriesLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 10% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing to note, we've identified 2 warning signs with Chosun RefractoriesLtd and understanding these should be part of your investment process.

While Chosun RefractoriesLtd 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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