Is Tae Kwang (KOSDAQ:023160) Set To Make A Turnaround?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. In light of that, from a first glance at Tae Kwang (KOSDAQ:023160), we've spotted some signs that it could be struggling, so let's investigate.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Tae Kwang, this is the formula:

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

0.0084 = ₩3.8b ÷ (₩466b - ₩18b) (Based on the trailing twelve months to September 2020).

So, Tae Kwang has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

Check out our latest analysis for Tae Kwang

Above you can see how the current ROCE for Tae Kwang 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 Tae Kwang here for free.

How Are Returns Trending?

In terms of Tae Kwang's historical ROCE movements, the trend doesn't inspire confidence. About two years ago, returns on capital were 1.9%, however they're now substantially lower than that as we saw above. 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 two years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tae Kwang becoming one if things continue as they have.

The Bottom Line On Tae Kwang's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 25% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 2 warning signs for Tae Kwang that we think you should be aware of.

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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.
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