Formetal (KOSDAQ:119500) Is Finding It Tricky To Allocate Its Capital

What underlying fundamental trends can indicate that a company might be 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. 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. On that note, looking into Formetal (KOSDAQ:119500), we weren't too upbeat about how things were going.

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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. The formula for this calculation on Formetal is:

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

0.029 = ₩1.5b ÷ (₩62b - ₩11b) (Based on the trailing twelve months to December 2024).

Therefore, Formetal has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.3%.

View our latest analysis for Formetal

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're interested in investigating Formetal's past further, check out this free graph covering Formetal's past earnings, revenue and cash flow .

What Does the ROCE Trend For Formetal Tell Us?

There is reason to be cautious about Formetal, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 4.1% 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Formetal becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Formetal is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 83% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Formetal does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While Formetal may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.