Returns On Capital Are Showing Encouraging Signs At Lake Materials (KOSDAQ:281740)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Lake Materials (KOSDAQ:281740) so let's look a bit deeper.

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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. To calculate this metric for Lake Materials, this is the formula:

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

0.093 = ₩22b ÷ (₩351b - ₩114b) (Based on the trailing twelve months to December 2024).

So, Lake Materials has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 7.1%.

See our latest analysis for Lake Materials

In the above chart we have measured Lake Materials' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Lake Materials .

What Does the ROCE Trend For Lake Materials Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.3%. The amount of capital employed has increased too, by 421%. So we're very much inspired by what we're seeing at Lake Materials thanks to its ability to profitably reinvest capital.

What We Can Learn From Lake Materials' ROCE

To sum it up, Lake Materials has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Lake Materials, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Lake Materials 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.