Be Wary Of Lotte Energy Materials (KRX:020150) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Lotte Energy Materials (KRX:020150), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Lotte Energy Materials:

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

0.012 = ₩25b ÷ (₩2.4t - ₩303b) (Based on the trailing twelve months to September 2023).

Thus, Lotte Energy Materials has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.5%.

View our latest analysis for Lotte Energy Materials

In the above chart we have measured Lotte Energy Materials' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Lotte Energy Materials for free.

What Does the ROCE Trend For Lotte Energy Materials Tell Us?

On the surface, the trend of ROCE at Lotte Energy Materials doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.2% from 7.9% five years ago. However it looks like Lotte Energy Materials might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Lotte Energy Materials is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Lotte Energy Materials could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for A020150 on our platform quite valuable.

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. 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.