Returns On Capital At Youlchon ChemicalLtd (KRX:008730) Paint An Interesting Picture

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Youlchon ChemicalLtd (KRX:008730) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Youlchon ChemicalLtd:

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

0.061 = ₩28b ÷ (₩629b - ₩173b) (Based on the trailing twelve months to September 2020).

So, Youlchon ChemicalLtd has an ROCE of 6.1%. Even though it's in line with the industry average of 5.7%, it's still a low return by itself.

See our latest analysis for Youlchon ChemicalLtd

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

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Youlchon ChemicalLtd's returns and its level of capital employed because both metrics have been steady for the past two years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Youlchon ChemicalLtd doesn't end up being a multi-bagger in a few years time.

The Bottom Line

In summary, Youlchon ChemicalLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 153% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 2 warning signs for Youlchon ChemicalLtd you'll probably want to know about.

While Youlchon ChemicalLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you decide to trade Youlchon ChemicalLtd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.