There Are Reasons To Feel Uneasy About Korea Zinc Company's (KRX:010130) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Korea Zinc Company (KRX:010130) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Korea Zinc Company, this is the formula:

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

0.076 = ₩809b ÷ (₩13t - ₩2.7t) (Based on the trailing twelve months to June 2024).

Therefore, Korea Zinc Company has an ROCE of 7.6%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 5.2%.

View our latest analysis for Korea Zinc Company

Above you can see how the current ROCE for Korea Zinc Company compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Korea Zinc Company .

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 54%. That being said, Korea Zinc Company raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Korea Zinc Company probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Korea Zinc Company's current liabilities have increased over the last five years to 21% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 7.6%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On Korea Zinc Company's ROCE

Bringing it all together, while we're somewhat encouraged by Korea Zinc Company's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 218% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 2 warning signs facing Korea Zinc Company that you might find interesting.

While Korea Zinc Company may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.