Be Wary Of Sangsangin Industry (KOSDAQ:101000) And Its Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Sangsangin Industry (KOSDAQ:101000), the trends above didn't look too great.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sangsangin Industry:

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

0.032 = ₩1.0b ÷ (₩42b - ₩10b) (Based on the trailing twelve months to September 2020).

So, Sangsangin Industry has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 5.4%.

Check out our latest analysis for Sangsangin Industry

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

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 15% five years ago and the business is utilizing 51% less capital, even after their capital raise (conducted prior to the latest reporting period).

On a side note, Sangsangin Industry has done well to pay down its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Unsurprisingly then, the stock has dived 98% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with Sangsangin Industry (at least 2 which are potentially serious) , and understanding them would certainly be useful.

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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