Returns On Capital At LS ELECTRIC (KRX:010120) Paint An Interesting Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think LS ELECTRIC (KRX:010120) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for LS ELECTRIC:

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

0.069 = ₩134b ÷ (₩2.5t - ₩617b) (Based on the trailing twelve months to September 2020).

Therefore, LS ELECTRIC has an ROCE of 6.9%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.

Check out our latest analysis for LS ELECTRIC

Above you can see how the current ROCE for LS ELECTRIC 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 LS ELECTRIC.

How Are Returns Trending?

When we looked at the ROCE trend at LS ELECTRIC, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.9% from 11% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 LS ELECTRIC's ROCE

Bringing it all together, while we're somewhat encouraged by LS ELECTRIC's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 39% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

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

While LS ELECTRIC 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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