We're Watching These Trends At KG Chemical (KRX:001390)

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating KG Chemical (KRX:001390), we don't think it's current trends fit the mold of a multi-bagger.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on KG Chemical is:

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

0.081 = ₩218b ÷ (₩4.1t - ₩1.4t) (Based on the trailing twelve months to September 2020).

Thus, KG Chemical has an ROCE of 8.1%. Even though it's in line with the industry average of 8.0%, it's still a low return by itself.

See our latest analysis for KG Chemical

Historical performance is a great place to start when researching a stock so above you can see the gauge for KG Chemical's ROCE against it's prior returns. If you're interested in investigating KG Chemical's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at KG Chemical. Over the past five years, ROCE has remained relatively flat at around 8.1% and the business has deployed 411% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

In summary, KG Chemical has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 74% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 2 warning signs with KG Chemical (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

While KG Chemical 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. 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.
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