Can ISU Chemical (KRX:005950) Continue To Grow Its Returns On Capital?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at ISU Chemical (KRX:005950) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for ISU Chemical:

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

0.033 = ₩22b ÷ (₩1.2t - ₩501b) (Based on the trailing twelve months to September 2020).

Therefore, ISU Chemical has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.0%.

Check out our latest analysis for ISU Chemical

Historical performance is a great place to start when researching a stock so above you can see the gauge for ISU Chemical's ROCE against it's prior returns. If you'd like to look at how ISU Chemical 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 ISU Chemical's ROCE Trend?

We're delighted to see that ISU Chemical is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.3%, which is always encouraging. While returns have increased, the amount of capital employed by ISU Chemical has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Another thing to note, ISU Chemical has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

As discussed above, ISU Chemical appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 81% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

ISU Chemical does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those can't be ignored...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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