Here's What's Concerning About Lotte Energy Materials' (KRX:020150) Returns On Capital

There are a few key trends to look for if we want to identify the next 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Lotte Energy Materials (KRX:020150) and its ROCE trend, we weren't exactly thrilled.

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 Lotte Energy Materials is:

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

0.0046 = ₩10.0b ÷ (₩2.5t - ₩361b) (Based on the trailing twelve months to March 2024).

Therefore, Lotte Energy Materials has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 6.9%.

Check out 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're interested, you can view the analysts predictions in our free analyst report for Lotte Energy Materials .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Lotte Energy Materials, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.6% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

While returns have fallen for Lotte Energy Materials in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 53% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Lotte Energy Materials, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Lotte Energy Materials isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.