Should We Be Excited About The Trends Of Returns At NOROO PAINT & COATINGS (KRX:090350)?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at NOROO PAINT & COATINGS (KRX:090350), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for NOROO PAINT & COATINGS, this is the formula:

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

0.065 = ₩27b ÷ (₩664b - ₩244b) (Based on the trailing twelve months to June 2020).

So, NOROO PAINT & COATINGS has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.5%.

Check out our latest analysis for NOROO PAINT & COATINGS

In the above chart we have measured NOROO PAINT & COATINGS' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Over the past five years, NOROO PAINT & COATINGS' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if NOROO PAINT & COATINGS doesn't end up being a multi-bagger in a few years time.

Our Take On NOROO PAINT & COATINGS' ROCE

In summary, NOROO PAINT & COATINGS isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 16% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

NOROO PAINT & COATINGS does have some risks though, and we've spotted 2 warning signs for NOROO PAINT & COATINGS that you might be interested in.

While NOROO PAINT & COATINGS 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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