Is This A Sign of Things To Come At EXA E&C (KOSDAQ:054940)?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at EXA E&C (KOSDAQ:054940), we've spotted some signs that it could be struggling, so let's investigate.

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

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 EXA E&C, this is the formula:

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

0.046 = ₩3.7b ÷ (₩154b - ₩74b) (Based on the trailing twelve months to September 2020).

Thus, EXA E&C has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.8%.

Check out our latest analysis for EXA E&C

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

What Can We Tell From EXA E&C's ROCE Trend?

There is reason to be cautious about EXA E&C, given the returns are trending downwards. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on EXA E&C becoming one if things continue as they have.

On a side note, EXA E&C's current liabilities have increased over the last five years to 48% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On EXA E&C's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 24% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for EXA E&C (of which 1 shouldn't be ignored!) that you should know about.

While EXA E&C isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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