Is Samil Enterprise (KOSDAQ:002290) Using Capital Effectively?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Samil Enterprise (KOSDAQ:002290), we weren't too upbeat about how things were going.

What is 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. To calculate this metric for Samil Enterprise, this is the formula:

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

0.042 = ₩2.5b ÷ (₩68b - ₩7.3b) (Based on the trailing twelve months to December 2020).

Thus, Samil Enterprise has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 8.4%.

See our latest analysis for Samil Enterprise

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

How Are Returns Trending?

In terms of Samil Enterprise's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 6.0% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Samil Enterprise becoming one if things continue as they have.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 57% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 1 warning sign for Samil Enterprise you'll probably want to know about.

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