Returns On Capital At Hy-Lok (KOSDAQ:013030) Paint A Concerning Picture

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Hy-Lok (KOSDAQ:013030), so let's see why.

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 Hy-Lok is:

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

0.047 = ₩16b ÷ (₩365b - ₩20b) (Based on the trailing twelve months to December 2020).

Therefore, Hy-Lok has an ROCE of 4.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.3%.

See our latest analysis for Hy-Lok

Above you can see how the current ROCE for Hy-Lok compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hy-Lok here for free.

So How Is Hy-Lok's ROCE Trending?

There is reason to be cautious about Hy-Lok, given the returns are trending downwards. To be more specific, the ROCE was 18% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Hy-Lok becoming one if things continue as they have.

The Bottom Line On Hy-Lok's ROCE

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. It should come as no surprise then that the stock has fallen 34% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Hy-Lok does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Hy-Lok isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

When trading Hy-Lok or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.