The Trends At Nexen Tire (KRX:002350) That You Should Know About

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. 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 Nexen Tire (KRX:002350), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Nexen Tire is:

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

0.018 = ₩49b ÷ (₩3.5t - ₩736b) (Based on the trailing twelve months to September 2020).

Thus, Nexen Tire 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%.

See our latest analysis for Nexen Tire

In the above chart we have measured Nexen Tire'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 report for Nexen Tire.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Nexen Tire, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.8% from 11% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Nexen Tire have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 38% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Nexen Tire does come with some risks, and we've found 3 warning signs that you should be aware of.

While Nexen Tire may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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