Is There More Growth In Store For SamYoung ChemicalLtd's (KRX:003720) Returns On Capital?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. With that in mind, we've noticed some promising trends at SamYoung ChemicalLtd (KRX:003720) so let's look a bit deeper.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on SamYoung ChemicalLtd is:

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

0.039 = ₩2.3b ÷ (₩107b - ₩49b) (Based on the trailing twelve months to September 2020).

Thus, SamYoung ChemicalLtd has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.0%.

See our latest analysis for SamYoung ChemicalLtd

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'd like to look at how SamYoung ChemicalLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is SamYoung ChemicalLtd's ROCE Trending?

We're delighted to see that SamYoung ChemicalLtd is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 3.9% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 55%. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 46% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

In Conclusion...

In summary, it's great to see that SamYoung ChemicalLtd has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a solid 62% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 4 warning signs facing SamYoung ChemicalLtd that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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