Investors Could Be Concerned With CENTRAL MOTEKLtd's (KRX:308170) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within CENTRAL MOTEKLtd (KRX:308170), we weren't too hopeful.

Understanding 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. Analysts use this formula to calculate it for CENTRAL MOTEKLtd:

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

0.038 = ₩6.3b ÷ (₩272b - ₩107b) (Based on the trailing twelve months to December 2020).

Therefore, CENTRAL MOTEKLtd has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 5.1%.

Check out our latest analysis for CENTRAL MOTEKLtd

In the above chart we have measured CENTRAL MOTEKLtd'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 CENTRAL MOTEKLtd.

What The Trend Of ROCE Can Tell Us

In terms of CENTRAL MOTEKLtd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.9% one year ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last one year. If these trends continue, we wouldn't expect CENTRAL MOTEKLtd to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that CENTRAL MOTEKLtd is generating lower returns from the same amount of capital. And, the stock has remained flat over the last year, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching CENTRAL MOTEKLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

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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