Capital Allocation Trends At LG Chem (KRX:051910) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at LG Chem (KRX:051910) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on LG Chem is:

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

0.011 = ₩740b ÷ (₩89t - ₩20t) (Based on the trailing twelve months to September 2024).

Therefore, LG Chem has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.4%.

View our latest analysis for LG Chem

Above you can see how the current ROCE for LG Chem 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 analyst report for LG Chem .

What Can We Tell From LG Chem's ROCE Trend?

In terms of LG Chem's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 4.5% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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 LG Chem's ROCE

In summary, we're somewhat concerned by LG Chem's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 22% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, LG Chem does come with some risks, and we've found 2 warning signs that you should be aware of.

While LG Chem 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.