Capital Allocation Trends At Sung Kwang BendLtd (KOSDAQ:014620) Aren't Ideal

When researching a stock for investment, what can tell us that the company is 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. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Sung Kwang BendLtd (KOSDAQ:014620), so let's see why.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Sung Kwang BendLtd:

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

0.0023 = ₩1.1b ÷ (₩494b - ₩18b) (Based on the trailing twelve months to December 2020).

Thus, Sung Kwang BendLtd has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Building industry average of 4.3%.

View our latest analysis for Sung Kwang BendLtd

Above you can see how the current ROCE for Sung Kwang BendLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Sung Kwang BendLtd's ROCE Trend?

We are a bit worried about the trend of returns on capital at Sung Kwang BendLtd. About five years ago, returns on capital were 4.7%, 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. 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 Sung Kwang BendLtd to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Sung Kwang BendLtd is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 23% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 1 warning sign for Sung Kwang BendLtd that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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