Be Wary Of Lotte Chemical Titan Holding Berhad (KLSE:LCTITAN) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Lotte Chemical Titan Holding Berhad (KLSE:LCTITAN), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Lotte Chemical Titan Holding Berhad, this is the formula:

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

0.039 = RM591m ÷ (RM17b - RM1.7b) (Based on the trailing twelve months to March 2022).

So, Lotte Chemical Titan Holding Berhad has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.3%.

See our latest analysis for Lotte Chemical Titan Holding Berhad

In the above chart we have measured Lotte Chemical Titan Holding Berhad's 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.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Lotte Chemical Titan Holding Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Lotte Chemical Titan Holding Berhad's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Lotte Chemical Titan Holding Berhad. And there could be an opportunity here if other metrics look good too, because the stock has declined 55% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for Lotte Chemical Titan Holding Berhad that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.