Here's What's Concerning About Seoam Machinery IndustryLtd's (KOSDAQ:100660) Returns On Capital

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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Seoam Machinery IndustryLtd (KOSDAQ:100660), so let's see why.

Understanding 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. Analysts use this formula to calculate it for Seoam Machinery IndustryLtd:

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

0.0088 = ₩578m ÷ (₩76b - ₩10b) (Based on the trailing twelve months to December 2023).

Thus, Seoam Machinery IndustryLtd has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.2%.

Check out our latest analysis for Seoam Machinery IndustryLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Seoam Machinery IndustryLtd's ROCE against it's prior returns. If you're interested in investigating Seoam Machinery IndustryLtd's past further, check out this free graph covering Seoam Machinery IndustryLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Seoam Machinery IndustryLtd Tell Us?

There is reason to be cautious about Seoam Machinery IndustryLtd, given the returns are trending downwards. To be more specific, the ROCE was 5.1% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Seoam Machinery IndustryLtd to turn into a multi-bagger.

In Conclusion...

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. It should come as no surprise then that the stock has fallen 10% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Seoam Machinery IndustryLtd, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

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. 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.