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

What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at LG Energy Solution (KRX:373220) and its trend of ROCE, we really liked what we saw.

What Is 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 LG Energy Solution, this is the formula:

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

0.043 = ₩1.7t ÷ (₩49t - ₩10t) (Based on the trailing twelve months to March 2024).

Thus, LG Energy Solution has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.1%.

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for LG Energy Solution .

What The Trend Of ROCE Can Tell Us

We're delighted to see that LG Energy Solution is reaping rewards from its investments and is now generating some pre-tax profits. About three years ago the company was generating losses but things have turned around because it's now earning 4.3% on its capital. Not only that, but the company is utilizing 192% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 21%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On LG Energy Solution's ROCE

In summary, it's great to see that LG Energy Solution has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 38% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 2 warning signs for LG Energy Solution (1 is potentially serious) you should be aware of.

While LG Energy Solution 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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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.