Returns On Capital At Kukdong Oil & ChemicalsLtd (KRX:014530) Paint An Interesting Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Kukdong Oil & ChemicalsLtd (KRX:014530), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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 Kukdong Oil & ChemicalsLtd, this is the formula:

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

0.076 = ₩16b ÷ (₩296b - ₩80b) (Based on the trailing twelve months to September 2020).

Therefore, Kukdong Oil & ChemicalsLtd has an ROCE of 7.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.0%.

See our latest analysis for Kukdong Oil & ChemicalsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kukdong Oil & ChemicalsLtd's ROCE against it's prior returns. If you're interested in investigating Kukdong Oil & ChemicalsLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Kukdong Oil & ChemicalsLtd Tell Us?

On the surface, the trend of ROCE at Kukdong Oil & ChemicalsLtd doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 7.6%. 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.

What We Can Learn From Kukdong Oil & ChemicalsLtd's ROCE

In summary, we're somewhat concerned by Kukdong Oil & ChemicalsLtd's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 21% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Kukdong Oil & ChemicalsLtd does have some risks though, and we've spotted 1 warning sign for Kukdong Oil & ChemicalsLtd that you might be interested in.

While Kukdong Oil & ChemicalsLtd 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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