Should We Be Excited About The Trends Of Returns At CJ (KRX:001040)?

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at CJ (KRX:001040) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 CJ, this is the formula:

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

0.049 = ₩1.4t ÷ (₩41t - ₩12t) (Based on the trailing twelve months to September 2020).

So, CJ has an ROCE of 4.9%. In absolute terms, that's a low return, but it's much better than the Industrials industry average of 3.5%.

See our latest analysis for CJ

Above you can see how the current ROCE for CJ compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for CJ.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at CJ, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.9% from 7.8% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On CJ's ROCE

In summary, CJ is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 61% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

CJ does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While CJ may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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