AMOREPACIFIC Group (KRX:002790) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after briefly looking over the numbers, we don't think AMOREPACIFIC Group (KRX:002790) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on AMOREPACIFIC Group is:

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

0.023 = ₩151b ÷ (₩7.8t - ₩1.2t) (Based on the trailing twelve months to December 2020).

So, AMOREPACIFIC Group has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 6.7%.

See our latest analysis for AMOREPACIFIC Group

Above you can see how the current ROCE for AMOREPACIFIC Group 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 report on analyst forecasts for the company.

So How Is AMOREPACIFIC Group's ROCE Trending?

In terms of AMOREPACIFIC Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 18% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From AMOREPACIFIC Group's ROCE

In summary, we're somewhat concerned by AMOREPACIFIC Group's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 54% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching AMOREPACIFIC Group, you might be interested to know about the 3 warning signs that our analysis has discovered.

While AMOREPACIFIC Group 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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