Watos Corea's (KOSDAQ:079000) Returns On Capital Not Reflecting Well On The Business

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Watos Corea (KOSDAQ:079000), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Watos Corea, this is the formula:

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

0.0031 = ₩249m ÷ (₩84b - ₩4.3b) (Based on the trailing twelve months to March 2024).

Thus, Watos Corea has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Building industry average of 6.6%.

Check out our latest analysis for Watos Corea

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Watos Corea has performed in the past in other metrics, you can view this free graph of Watos Corea's past earnings, revenue and cash flow.

What Does the ROCE Trend For Watos Corea Tell Us?

We are a bit worried about the trend of returns on capital at Watos Corea. Unfortunately the returns on capital have diminished from the 2.1% that they were earning five years ago. 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 Watos Corea becoming one if things continue as they have.

What We Can Learn From Watos Corea's ROCE

In summary, it's unfortunate that Watos Corea is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 14% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know about the risks facing Watos Corea, we've discovered 4 warning signs that you should be aware of.

While Watos Corea 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com