Does LG Innotek (KRX:011070) Have The Makings Of A Multi-Bagger?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at LG Innotek (KRX:011070) and its trend of ROCE, we really liked what we saw.

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 LG Innotek is:

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

0.12 = ₩480b ÷ (₩6.4t - ₩2.4t) (Based on the trailing twelve months to September 2020).

So, LG Innotek has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.6% it's much better.

Check out our latest analysis for LG Innotek

Above you can see how the current ROCE for LG Innotek compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

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

Investors would be pleased with what's happening at LG Innotek. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The amount of capital employed has increased too, by 45%. So we're very much inspired by what we're seeing at LG Innotek thanks to its ability to profitably reinvest capital.

Our Take On LG Innotek's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what LG Innotek has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 68% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 2 warning signs for LG Innotek you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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