Can Korea Gas (KRX:036460) Continue To Grow Its Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Korea Gas' (KRX:036460) returns on capital, so let's have a look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Korea Gas:

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

0.036 = ₩1.1t ÷ (₩36t - ₩6.6t) (Based on the trailing twelve months to September 2020).

Therefore, Korea Gas has an ROCE of 3.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.8%.

Check out our latest analysis for Korea Gas

Above you can see how the current ROCE for Korea Gas compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Korea Gas.

What Can We Tell From Korea Gas' ROCE Trend?

While the ROCE is still rather low for Korea Gas, we're glad to see it heading in the right direction. The figures show that over the last five years, returns on capital have grown by 29%. The company is now earning ₩0.04 per dollar of capital employed. In regards to capital employed, Korea Gas appears to been achieving more with less, since the business is using 23% less capital to run its operation. Korea Gas may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

In Conclusion...

In summary, it's great to see that Korea Gas has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 13% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Korea Gas does come with some risks, and we've found 1 warning sign that you should be aware of.

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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