Youngsin Metal Industrial (KOSDAQ:007530) May Have Issues Allocating Its Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Youngsin Metal Industrial (KOSDAQ:007530), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Youngsin Metal Industrial is:

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

0.017 = ₩990m ÷ (₩133b - ₩75b) (Based on the trailing twelve months to December 2020).

Therefore, Youngsin Metal Industrial has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.3%.

View our latest analysis for Youngsin Metal Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Youngsin Metal Industrial's ROCE against it's prior returns. If you'd like to look at how Youngsin Metal Industrial has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Youngsin Metal Industrial Tell Us?

There is reason to be cautious about Youngsin Metal Industrial, given the returns are trending downwards. About five years ago, returns on capital were 4.6%, however they're now substantially lower than that as we saw above. 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 five years. If these trends continue, we wouldn't expect Youngsin Metal Industrial to turn into a multi-bagger.

On a side note, Youngsin Metal Industrial's current liabilities have increased over the last five years to 56% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Youngsin Metal Industrial's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 50% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Youngsin Metal Industrial does have some risks though, and we've spotted 2 warning signs for Youngsin Metal Industrial that you might be interested in.

While Youngsin Metal Industrial 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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