We're Watching These Trends At Korea Petroleum Industries (KRX:004090)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Korea Petroleum Industries (KRX:004090), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Korea Petroleum Industries:

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

0.06 = ₩12b ÷ (₩315b - ₩116b) (Based on the trailing twelve months to September 2020).

Therefore, Korea Petroleum Industries has an ROCE of 6.0%. On its own that's a low return, but compared to the average of 3.4% generated by the Basic Materials industry, it's much better.

View our latest analysis for Korea Petroleum Industries

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

What Can We Tell From Korea Petroleum Industries' ROCE Trend?

On the surface, the trend of ROCE at Korea Petroleum Industries doesn't inspire confidence. To be more specific, ROCE has fallen from 9.2% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

The Key Takeaway

To conclude, we've found that Korea Petroleum Industries is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 29% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to know some of the risks facing Korea Petroleum Industries we've found 4 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

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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