Returns On Capital Signal Difficult Times Ahead For Hwashin Precision Engineering (KOSDAQ:126640)

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Hwashin Precision Engineering (KOSDAQ:126640), we weren't too upbeat about how things were going.

We've discovered 3 warning signs about Hwashin Precision Engineering. View them for free.

Understanding Return On Capital Employed (ROCE)

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 Hwashin Precision Engineering:

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

0.012 = ₩1.3b ÷ (₩170b - ₩61b) (Based on the trailing twelve months to December 2024).

Thus, Hwashin Precision Engineering has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.5%.

View our latest analysis for Hwashin Precision Engineering

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hwashin Precision Engineering.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Hwashin Precision Engineering. About five years ago, returns on capital were 4.1%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Hwashin Precision Engineering to turn into a multi-bagger.

The Bottom Line On Hwashin Precision Engineering's ROCE

In summary, it's unfortunate that Hwashin Precision Engineering is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 34% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Hwashin Precision Engineering does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.