LG Household & Health Care (KRX:051900) Knows How to Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Ergo, when we looked at the ROCE trends at LG Household & Health Care (KRX:051900), we liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 LG Household & Health Care is:

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

0.23 = ₩1.2t ÷ (₩6.8t - ₩1.6t) (Based on the trailing twelve months to September 2020).

Thus, LG Household & Health Care has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Personal Products industry average of 6.8%.

See our latest analysis for LG Household & Health Care

Above you can see how the current ROCE for LG Household & Health Care 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.

How Are Returns Trending?

In terms of LG Household & Health Care's history of ROCE, it's quite impressive. The company has employed 75% more capital in the last five years, and the returns on that capital have remained stable at 23%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

The Bottom Line On LG Household & Health Care's ROCE

In summary, we're delighted to see that LG Household & Health Care has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 93% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

While LG Household & Health Care looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether A051900 is currently trading for a fair price.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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