The Returns On Capital At Clean & Science (KOSDAQ:045520) Don't Inspire Confidence

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Clean & Science (KOSDAQ:045520), so let's see why.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Clean & Science:

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

0.014 = ₩715m ÷ (₩92b - ₩42b) (Based on the trailing twelve months to September 2024).

So, Clean & Science has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.7%.

See our latest analysis for Clean & Science

Historical performance is a great place to start when researching a stock so above you can see the gauge for Clean & Science's ROCE against it's prior returns. If you'd like to look at how Clean & Science has performed in the past in other metrics, you can view this free graph of Clean & Science's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trend of ROCE at Clean & Science is showing some signs of weakness. The company used to generate 19% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 24% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 46%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Clean & Science's ROCE

To see Clean & Science reducing the capital employed in the business in tandem with diminishing returns, is concerning. This could explain why the stock has sunk a total of 81% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for Clean & Science (2 make us uncomfortable) 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.