Should We Be Excited About The Trends Of Returns At AMOREPACIFIC Group (KRX:002790)?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating AMOREPACIFIC Group (KRX:002790), we don't think it's current trends fit the mold of a multi-bagger.

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)

0.034 = ₩228b ÷ (₩7.8t - ₩1.1t) (Based on the trailing twelve months to September 2020).

Thus, AMOREPACIFIC Group has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 6.8%.

Check out 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'd like, you can check out the forecasts from the analysts covering AMOREPACIFIC Group here for free.

What Can We Tell From AMOREPACIFIC Group's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 17% five years ago, while capital employed has grown 32%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with AMOREPACIFIC Group's earnings and if they change as a result from the capital raise.

Our Take On AMOREPACIFIC Group's ROCE

In summary, we're somewhat concerned by AMOREPACIFIC Group's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 64% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, AMOREPACIFIC Group does come with some risks, and we've found 3 warning signs that you should be aware of.

While AMOREPACIFIC Group 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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