Capital Allocation Trends At Dongkuk Structures & Construction (KOSDAQ:100130) Aren't Ideal

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. So after we looked into Dongkuk Structures & Construction (KOSDAQ:100130), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

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 Dongkuk Structures & Construction, this is the formula:

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

0.038 = ₩11b ÷ (₩397b - ₩113b) (Based on the trailing twelve months to December 2020).

Thus, Dongkuk Structures & Construction has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Construction industry average of 8.4%.

See our latest analysis for Dongkuk Structures & Construction

In the above chart we have measured Dongkuk Structures & Construction's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Dongkuk Structures & Construction here for free.

The Trend Of ROCE

There is reason to be cautious about Dongkuk Structures & Construction, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 6.5% that they were earning five years ago. 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. If these trends continue, we wouldn't expect Dongkuk Structures & Construction to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Dongkuk Structures & Construction is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 34% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Dongkuk Structures & Construction does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...

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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