GH Advanced Materials (KOSDAQ:130500) Is Looking To Continue Growing Its Returns On Capital

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at GH Advanced Materials (KOSDAQ:130500) so let's look a bit deeper.

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. The formula for this calculation on GH Advanced Materials is:

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

0.072 = ₩8.5b ÷ (₩191b - ₩72b) (Based on the trailing twelve months to June 2024).

Thus, GH Advanced Materials has an ROCE of 7.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.3%.

See our latest analysis for GH Advanced Materials

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of GH Advanced Materials.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.2%. 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 153%. So we're very much inspired by what we're seeing at GH Advanced Materials thanks to its ability to profitably reinvest capital.

Our Take On GH Advanced Materials' ROCE

In summary, it's great to see that GH Advanced Materials 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. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 2.3% to shareholders. So with that in mind, we think the stock deserves further research.

If you want to know some of the risks facing GH Advanced Materials we've found 4 warning signs (2 are significant!) that you should be aware of before investing here.

While GH Advanced Materials 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.