Returns on Capital Paint A Bright Future For LS Eco Energy (KRX:229640)

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. 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. With that in mind, the ROCE of LS Eco Energy (KRX:229640) looks great, so lets see what the trend can tell us.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for LS Eco Energy:

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

0.22 = ₩45b ÷ (₩489b - ₩284b) (Based on the trailing twelve months to December 2024).

Thus, LS Eco Energy has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Electrical industry average of 7.1%.

Check out our latest analysis for LS Eco Energy

Above you can see how the current ROCE for LS Eco Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for LS Eco Energy .

The Trend Of ROCE

Investors would be pleased with what's happening at LS Eco Energy. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 22%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 22%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a separate but related note, it's important to know that LS Eco Energy has a current liabilities to total assets ratio of 58%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From LS Eco Energy's ROCE

In summary, it's great to see that LS Eco Energy can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing LS Eco Energy we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.