What Do The Returns At ILJIN Materials (KRX:020150) Mean Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at ILJIN Materials (KRX:020150) and its trend of ROCE, we really liked what we saw.

What is 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. The formula for this calculation on ILJIN Materials is:

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

0.04 = ₩39b ÷ (₩1.1t - ₩101b) (Based on the trailing twelve months to September 2020).

Thus, ILJIN Materials has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.6%.

Check out our latest analysis for ILJIN Materials

In the above chart we have measured ILJIN Materials' 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.

So How Is ILJIN Materials' ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 4.0%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 164%. 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 9.4%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that ILJIN Materials has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

All in all, it's terrific to see that ILJIN Materials is reaping the rewards from prior investments and is growing its capital base. And a remarkable 613% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

ILJIN Materials does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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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This article by Simply Wall St is general in nature. 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.
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