Is There More Growth In Store For Dongnam Chemical's (KRX:023450) Returns On Capital?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Dongnam Chemical (KRX:023450) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Dongnam Chemical, this is the formula:

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

0.18 = ₩13b ÷ (₩90b - ₩14b) (Based on the trailing twelve months to September 2020).

Therefore, Dongnam Chemical has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Chemicals industry.

View our latest analysis for Dongnam Chemical

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Dongnam Chemical's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Dongnam Chemical's ROCE Trend?

Investors would be pleased with what's happening at Dongnam Chemical. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. 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 31%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

All in all, it's terrific to see that Dongnam Chemical is reaping the rewards from prior investments and is growing its capital base. And a remarkable 393% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Dongnam Chemical can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Dongnam Chemical that we think you should be aware of.

While Dongnam Chemical 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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