How Has Daewon Kang Up (KRX:000430) Allocated Its Capital?

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Daewon Kang Up (KRX:000430), so let's see why.

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 Daewon Kang Up is:

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

0.018 = ₩12b ÷ (₩1.0t - ₩368b) (Based on the trailing twelve months to September 2020).

Thus, Daewon Kang Up has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 4.1%.

Check out our latest analysis for Daewon Kang Up

Historical performance is a great place to start when researching a stock so above you can see the gauge for Daewon Kang Up's ROCE against it's prior returns. If you're interested in investigating Daewon Kang Up's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Daewon Kang Up Tell Us?

We are a bit worried about the trend of returns on capital at Daewon Kang Up. To be more specific, the ROCE was 5.3% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Daewon Kang Up becoming one if things continue as they have.

What We Can Learn From Daewon Kang Up's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 9.4% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing: We've identified 6 warning signs with Daewon Kang Up (at least 2 which shouldn't be ignored) , and understanding these would certainly be useful.

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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This article by Simply Wall St is general in nature. 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.
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