Lotte FoodLtd (KRX:002270) Hasn't Managed To Accelerate Its Returns

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Lotte FoodLtd (KRX:002270) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Lotte FoodLtd is:

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

0.046 = ₩44b ÷ (₩1.3t - ₩318b) (Based on the trailing twelve months to December 2020).

Thus, Lotte FoodLtd has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Food industry average of 7.4%.

See our latest analysis for Lotte FoodLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lotte FoodLtd's ROCE against it's prior returns. If you'd like to look at how Lotte FoodLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Lotte FoodLtd's ROCE Trend?

There hasn't been much to report for Lotte FoodLtd's returns and its level of capital employed because both metrics have been steady for the past one year. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Lotte FoodLtd doesn't end up being a multi-bagger in a few years time.

Our Take On Lotte FoodLtd's ROCE

In summary, Lotte FoodLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Lotte FoodLtd has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Lotte FoodLtd (of which 1 is significant!) that you should know about.

While Lotte FoodLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you decide to trade Lotte FoodLtd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.