There's Been No Shortage Of Growth Recently For LG Innotek's (KRX:011070) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, LG Innotek (KRX:011070) looks quite promising in regards to its trends of return on capital.

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. 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)

0.13 = ₩995b ÷ (₩10t - ₩3.0t) (Based on the trailing twelve months to June 2024).

Thus, LG Innotek has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 6.9% it's much better.

Check out our latest analysis for LG Innotek

In the above chart we have measured LG Innotek's 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 analyst report for LG Innotek .

What Does the ROCE Trend For LG Innotek Tell Us?

The trends we've noticed at LG Innotek are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 100% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On LG Innotek's ROCE

In summary, it's great to see that LG Innotek can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 98% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While LG Innotek looks impressive, no company is worth an infinite price. The intrinsic value infographic for A011070 helps visualize whether it is currently trading for a fair price.

While LG Innotek 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.