Investors Will Want Kumho Petrochemical's (KRX:011780) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in Kumho Petrochemical's (KRX:011780) returns on capital, so let's have a look.

Understanding 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. The formula for this calculation on Kumho Petrochemical is:

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

0.19 = ₩743b ÷ (₩5.0t - ₩1.2t) (Based on the trailing twelve months to December 2020).

Thus, Kumho Petrochemical has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Chemicals industry.

View our latest analysis for Kumho Petrochemical

Above you can see how the current ROCE for Kumho Petrochemical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kumho Petrochemical.

What Does the ROCE Trend For Kumho Petrochemical Tell Us?

The trends we've noticed at Kumho Petrochemical are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 43%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, Kumho Petrochemical has decreased current liabilities to 24% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Kumho Petrochemical has. Since the stock has returned a staggering 325% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Kumho Petrochemical does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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