The Returns At KPX ChemicalLtd (KRX:025000) Provide Us With Signs Of What's To Come

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think KPX ChemicalLtd (KRX:025000) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 KPX ChemicalLtd, this is the formula:

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

0.10 = ₩52b ÷ (₩610b - ₩87b) (Based on the trailing twelve months to September 2020).

Therefore, KPX ChemicalLtd has an ROCE of 10.0%. On its own that's a low return, but compared to the average of 8.0% generated by the Chemicals industry, it's much better.

Check out our latest analysis for KPX ChemicalLtd

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 KPX ChemicalLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For KPX ChemicalLtd Tell Us?

The returns on capital haven't changed much for KPX ChemicalLtd in recent years. The company has employed 25% more capital in the last five years, and the returns on that capital have remained stable at 10.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

As we've seen above, KPX ChemicalLtd's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 83% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

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

While KPX 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. 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.
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