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Should You Be Impressed By Kukdo Chemical's (KRX:007690) Returns on Capital?
What trends should we look for it we want to identify stocks that can 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Kukdo Chemical (KRX:007690) and its ROCE trend, we weren't exactly thrilled.
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 Kukdo Chemical is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = ₩46b ÷ (₩1.0t - ₩298b) (Based on the trailing twelve months to September 2020).
So, Kukdo Chemical has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Chemicals industry average of 8.0%.
View our latest analysis for Kukdo Chemical
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're interested in investigating Kukdo Chemical's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at Kukdo Chemical, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like Kukdo Chemical might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 Bottom Line
In summary, Kukdo Chemical is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 9.1% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Kukdo Chemical does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...
While Kukdo Chemical isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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About KOSE:A007690
Low and slightly overvalued.