Paik Kwang Industrial's (KRX:001340) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Paik Kwang Industrial (KRX:001340), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Paik Kwang Industrial, this is the formula:

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

0.042 = ₩12b ÷ (₩433b - ₩148b) (Based on the trailing twelve months to March 2024).

Thus, Paik Kwang Industrial has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.6%.

Check out our latest analysis for Paik Kwang Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Paik Kwang Industrial's ROCE against it's prior returns. If you'd like to look at how Paik Kwang Industrial has performed in the past in other metrics, you can view this free graph of Paik Kwang Industrial's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Paik Kwang Industrial doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.2% from 13% five years ago. However it looks like Paik Kwang Industrial 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Paik Kwang Industrial's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 250% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 5 warning signs for Paik Kwang Industrial (3 are significant) you should be aware of.

While Paik Kwang Industrial 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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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.