Should You Be Impressed By Pan Ocean's (KRX:028670) Returns on Capital?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Pan Ocean (KRX:028670) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. The formula for this calculation on Pan Ocean is:

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

0.049 = US$181m ÷ (US$4.2b - US$515m) (Based on the trailing twelve months to September 2020).

Therefore, Pan Ocean has an ROCE of 4.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.7%.

View our latest analysis for Pan Ocean

Above you can see how the current ROCE for Pan Ocean compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Pan Ocean Tell Us?

Things have been pretty stable at Pan Ocean, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Pan Ocean in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

In Conclusion...

In summary, Pan Ocean isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 20% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing, we've spotted 1 warning sign facing Pan Ocean that you might find interesting.

While Pan Ocean 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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