Chinyang Poly UrethaneLtd's (KRX:010640) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Chinyang Poly UrethaneLtd (KRX:010640) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Chinyang Poly UrethaneLtd, this is the formula:

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

0.092 = ₩4.6b ÷ (₩58b - ₩8.2b) (Based on the trailing twelve months to September 2024).

So, Chinyang Poly UrethaneLtd has an ROCE of 9.2%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 7.0%.

View our latest analysis for Chinyang Poly UrethaneLtd

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

What Does the ROCE Trend For Chinyang Poly UrethaneLtd Tell Us?

There are better returns on capital out there than what we're seeing at Chinyang Poly UrethaneLtd. Over the past five years, ROCE has remained relatively flat at around 9.2% and the business has deployed 61% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In conclusion, Chinyang Poly UrethaneLtd has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 84% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 4 warning signs for Chinyang Poly UrethaneLtd (1 is a bit unpleasant) you should be aware of.

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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.