Is Seoyon (KRX:007860) Shrinking?

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Seoyon (KRX:007860), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Seoyon is:

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

0.018 = ₩20b ÷ (₩2.2t - ₩1.1t) (Based on the trailing twelve months to September 2020).

Thus, Seoyon 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 Seoyon

Historical performance is a great place to start when researching a stock so above you can see the gauge for Seoyon's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Seoyon, check out these free graphs here.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Seoyon. About five years ago, returns on capital were 7.7%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Seoyon becoming one if things continue as they have.

On a side note, Seoyon's current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Seoyon's ROCE

In summary, it's unfortunate that Seoyon is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 29% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Seoyon (2 make us uncomfortable) you should be aware of.

While Seoyon 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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