How Has Enertork (KOSDAQ:019990) Allocated Its 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Enertork (KOSDAQ:019990), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Enertork, this is the formula:

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

0.028 = ₩1.2b ÷ (₩46b - ₩2.2b) (Based on the trailing twelve months to September 2020).

Thus, Enertork has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.8%.

See our latest analysis for Enertork

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

What Does the ROCE Trend For Enertork Tell Us?

In terms of Enertork's historical ROCE movements, the trend doesn't inspire confidence. About four years ago, returns on capital were 5.9%, 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. 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 Enertork to turn into a multi-bagger.

The Bottom Line On Enertork's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 12% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing Enertork we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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