Stock Analysis

Will ISU Chemical's (KRX:005950) Growth In ROCE Persist?

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KOSE:A005950
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at ISU Chemical (KRX:005950) so let's look a bit deeper.

Understanding 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. To calculate this metric for ISU Chemical, this is the formula:

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).

Thus, 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 7.9%.

See our latest analysis for ISU Chemical

roce
KOSE:A005950 Return on Capital Employed March 2nd 2021

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 want to delve into the historical earnings, revenue and cash flow of ISU Chemical, check out these free graphs here.

What Does the ROCE Trend For ISU Chemical Tell Us?

We're delighted to see that ISU Chemical is reaping rewards from its investments and has now broken into profitability. The company now earns 3.3% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a separate but related note, it's important to know that ISU Chemical has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On ISU Chemical's ROCE

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. Since the stock has only returned 6.5% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

One more thing: We've identified 4 warning signs with ISU Chemical (at least 2 which are significant) , and understanding these would certainly be useful.

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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About KOSE:A005950

ISU Chemical

ISU Chemical Co., Ltd. produces and sells petrochemicals and fine chemicals primarily in South Korea.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation4
Future Growth3
Past Performance3
Financial Health4
Dividends2

Read more about these checks in the individual report sections or in our analysis model.

Good value with adequate balance sheet.

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