Here's What To Make Of Foosung's (KRX:093370) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Foosung (KRX:093370) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Foosung is:

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

0.00018 = ₩80m ÷ (₩543b - ₩123b) (Based on the trailing twelve months to September 2020).

So, Foosung has an ROCE of 0.02%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.0%.

View our latest analysis for Foosung

In the above chart we have measured Foosung's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Foosung.

What Can We Tell From Foosung's ROCE Trend?

On the surface, the trend of ROCE at Foosung doesn't inspire confidence. Around five years ago the returns on capital were 4.6%, but since then they've fallen to 0.02%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Foosung's ROCE

Bringing it all together, while we're somewhat encouraged by Foosung's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 118% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Foosung we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Foosung isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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