Is SAMYOUNG M-Tek (KOSDAQ:054540) Using Capital Effectively?

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within SAMYOUNG M-Tek (KOSDAQ:054540), we weren't too hopeful.

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 SAMYOUNG M-Tek, this is the formula:

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

0.042 = ₩3.4b ÷ (₩119b - ₩37b) (Based on the trailing twelve months to September 2020).

Therefore, SAMYOUNG M-Tek has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

See our latest analysis for SAMYOUNG M-Tek

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

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at SAMYOUNG M-Tek. About five years ago, returns on capital were 6.0%, 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. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on SAMYOUNG M-Tek becoming one if things continue as they have.

The Bottom Line On SAMYOUNG M-Tek'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 67% 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.

SAMYOUNG M-Tek does have some risks though, and we've spotted 2 warning signs for SAMYOUNG M-Tek that you might be interested in.

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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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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