Returns On Capital - An Important Metric For LG Innotek (KRX:011070)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at LG Innotek (KRX:011070) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for LG Innotek, this is the formula:

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

0.18 = ₩681b ÷ (₩6.0t - ₩2.3t) (Based on the trailing twelve months to December 2020).

So, LG Innotek has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Electronic industry.

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'd like, you can check out the forecasts from the analysts covering LG Innotek here for free.

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

We like the trends that we're seeing from LG Innotek. The data shows that returns on capital have increased substantially over the last five years to 18%. The amount of capital employed has increased too, by 44%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From LG Innotek's ROCE

All in all, it's terrific to see that LG Innotek is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 166% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 3 warning signs for LG Innotek that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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