Be Wary Of Semyung Electric MachineryLtd (KOSDAQ:017510) And Its Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount 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. So after glancing at the trends within Semyung Electric MachineryLtd (KOSDAQ:017510), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Semyung Electric MachineryLtd, this is the formula:

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

0.0032 = ₩248m ÷ (₩81b - ₩2.6b) (Based on the trailing twelve months to September 2020).

Therefore, Semyung Electric MachineryLtd has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.8%.

Check out our latest analysis for Semyung Electric MachineryLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Semyung Electric MachineryLtd, check out these free graphs here.

How Are Returns Trending?

In terms of Semyung Electric MachineryLtd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.6% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Semyung Electric MachineryLtd to turn into a multi-bagger.

What We Can Learn From Semyung Electric MachineryLtd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 49% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Semyung Electric MachineryLtd does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Semyung Electric MachineryLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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