Returns On Capital Are Showing Encouraging Signs At LG Energy Solution (KRX:373220)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at LG Energy Solution (KRX:373220) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 LG Energy Solution:

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

0.063 = ₩2.2t ÷ (₩45t - ₩11t) (Based on the trailing twelve months to December 2023).

Therefore, LG Energy Solution has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.3%.

View our latest analysis for LG Energy Solution

In the above chart we have measured LG Energy Solution's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for LG Energy Solution .

What The Trend Of ROCE Can Tell Us

LG Energy Solution has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses three years ago, but now it's earning 6.3% which is a sight for sore eyes. In addition to that, LG Energy Solution is employing 164% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, LG Energy Solution has decreased current liabilities to 24% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that LG Energy Solution has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

To the delight of most shareholders, LG Energy Solution has now broken into profitability. Given the stock has declined 36% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing LG Energy Solution, we've discovered 1 warning sign that you should be aware of.

While LG Energy Solution 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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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.