Be Wary Of DAEYANG ELECTRIC.Co.Ltd (KOSDAQ:108380) And Its Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at DAEYANG ELECTRIC.Co.Ltd (KOSDAQ:108380), so let's see why.

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. Analysts use this formula to calculate it for DAEYANG ELECTRIC.Co.Ltd:

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

0.012 = ₩2.7b ÷ (₩298b - ₩71b) (Based on the trailing twelve months to December 2023).

Thus, DAEYANG ELECTRIC.Co.Ltd has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.3%.

See our latest analysis for DAEYANG ELECTRIC.Co.Ltd

In the above chart we have measured DAEYANG ELECTRIC.Co.Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for DAEYANG ELECTRIC.Co.Ltd .

So How Is DAEYANG ELECTRIC.Co.Ltd's ROCE Trending?

There is reason to be cautious about DAEYANG ELECTRIC.Co.Ltd, given the returns are trending downwards. About five years ago, returns on capital were 4.8%, 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. 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 DAEYANG ELECTRIC.Co.Ltd to turn into a multi-bagger.

What We Can Learn From DAEYANG ELECTRIC.Co.Ltd's ROCE

In summary, it's unfortunate that DAEYANG ELECTRIC.Co.Ltd is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 22% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we've found 1 warning sign for DAEYANG ELECTRIC.Co.Ltd that we think you should be aware of.

While DAEYANG ELECTRIC.Co.Ltd 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.