Kumho Petro ChemicalLtd (KRX:011780) Is Reinvesting At Lower Rates Of Return

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Kumho Petro ChemicalLtd (KRX:011780) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Kumho Petro ChemicalLtd is:

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

0.056 = ₩361b ÷ (₩8.0t - ₩1.5t) (Based on the trailing twelve months to December 2023).

Thus, Kumho Petro ChemicalLtd has an ROCE of 5.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.0%.

View our latest analysis for Kumho Petro ChemicalLtd

In the above chart we have measured Kumho Petro ChemicalLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Kumho Petro ChemicalLtd for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Kumho Petro ChemicalLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.6% from 19% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Kumho Petro ChemicalLtd has decreased its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Kumho Petro ChemicalLtd have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 47% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Kumho Petro ChemicalLtd does have some risks though, and we've spotted 2 warning signs for Kumho Petro ChemicalLtd that you might be interested in.

While Kumho Petro ChemicalLtd 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.