Investors Could Be Concerned With LG Chem's (KRX:051910) Returns On Capital

There are a few key trends to look for if we want to identify the next 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at LG Chem (KRX:051910) and its ROCE trend, we weren't exactly thrilled.

We check all companies for important risks. See what we found for LG Chem in our free report.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on LG Chem is:

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

0.013 = ₩917b ÷ (₩94t - ₩21t) (Based on the trailing twelve months to December 2024).

So, LG Chem has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.1%.

See our latest analysis for LG Chem

In the above chart we have measured LG Chem's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering LG Chem for free.

So How Is LG Chem's ROCE Trending?

On the surface, the trend of ROCE at LG Chem doesn't inspire confidence. To be more specific, ROCE has fallen from 3.3% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On LG Chem's ROCE

In summary, we're somewhat concerned by LG Chem's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 51% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

LG Chem could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for A051910 on our platform quite valuable.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.