What Do The Returns On Capital At Korea Cast Iron Pipe Ind (KRX:000970) Tell Us?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Korea Cast Iron Pipe Ind (KRX:000970), it didn't seem to tick all of these boxes.

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. To calculate this metric for Korea Cast Iron Pipe Ind, this is the formula:

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

0.038 = ₩11b ÷ (₩339b - ₩55b) (Based on the trailing twelve months to September 2020).

Therefore, Korea Cast Iron Pipe Ind has an ROCE of 3.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.0%.

Check out our latest analysis for Korea Cast Iron Pipe Ind

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Korea Cast Iron Pipe Ind, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.8% from 5.0% five years ago. 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.

The Bottom Line On Korea Cast Iron Pipe Ind's ROCE

Bringing it all together, while we're somewhat encouraged by Korea Cast Iron Pipe Ind's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 19% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 1 warning sign for Korea Cast Iron Pipe Ind that we think you should be aware of.

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. 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.
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