There Are Reasons To Feel Uneasy About Chemtros' (KOSDAQ:220260) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Chemtros (KOSDAQ:220260), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Chemtros:

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

0.022 = ₩1.3b ÷ (₩71b - ₩15b) (Based on the trailing twelve months to December 2020).

Thus, Chemtros has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.3%.

Check out our latest analysis for Chemtros

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're interested in investigating Chemtros' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Chemtros' historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 12%, but since then they've fallen to 2.2%. However it looks like Chemtros might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Chemtros' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 55% over the last three years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 2 warning signs for Chemtros you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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