Our Take On The Returns On Capital At Moorim P&P (KRX:009580)

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Moorim P&P (KRX:009580), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Moorim P&P, this is the formula:

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

0.024 = ₩24b ÷ (₩1.4t - ₩388b) (Based on the trailing twelve months to September 2020).

Thus, Moorim P&P has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Forestry industry average of 5.2%.

View our latest analysis for Moorim P&P

In the above chart we have measured Moorim P&P's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Moorim P&P's ROCE Trend?

In terms of Moorim P&P's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.4% from 4.7% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Moorim P&P's ROCE

In summary, we're somewhat concerned by Moorim P&P's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 39% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing Moorim P&P we've found 3 warning signs (1 makes us a bit uncomfortable!) 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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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.
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