Korea Petrochemical Ind's (KRX:006650) Returns On Capital Tell Us There Is Reason To Feel Uneasy
When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Korea Petrochemical Ind (KRX:006650), we've spotted some signs that it could be struggling, so let's investigate.
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. Analysts use this formula to calculate it for Korea Petrochemical Ind:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0084 = ₩19b ÷ (₩2.7t - ₩448b) (Based on the trailing twelve months to September 2025).
Thus, Korea Petrochemical Ind has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.2%.
See our latest analysis for Korea Petrochemical Ind
In the above chart we have measured Korea Petrochemical Ind's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Korea Petrochemical Ind .
What Does the ROCE Trend For Korea Petrochemical Ind Tell Us?
There is reason to be cautious about Korea Petrochemical Ind, given the returns are trending downwards. To be more specific, the ROCE was 5.0% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Korea Petrochemical Ind to turn into a multi-bagger.
On a side note, Korea Petrochemical Ind's current liabilities have increased over the last five years to 17% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
The Bottom Line On Korea Petrochemical Ind's ROCE
In summary, it's unfortunate that Korea Petrochemical Ind is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 26% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One more thing, we've spotted 1 warning sign facing Korea Petrochemical Ind that you might find interesting.
While Korea Petrochemical Ind 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.