Returns On Capital At DAEMO Engineering (KOSDAQ:317850) Paint A Concerning Picture

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. 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 DAEMO Engineering (KOSDAQ:317850), we weren't too upbeat about how things were going.

Understanding 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. The formula for this calculation on DAEMO Engineering is:

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

0.0034 = ₩222m ÷ (₩77b - ₩12b) (Based on the trailing twelve months to September 2020).

So, DAEMO Engineering has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.4%.

View our latest analysis for DAEMO Engineering

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 DAEMO Engineering's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is DAEMO Engineering's ROCE Trending?

We are a bit worried about the trend of returns on capital at DAEMO Engineering. Unfortunately the returns on capital have diminished from the 1.9% that they were earning one year ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last one year. If these trends continue, we wouldn't expect DAEMO Engineering to turn into a multi-bagger.

The Bottom Line On DAEMO Engineering's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 19% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 6 warning signs we've spotted with DAEMO Engineering (including 2 which can't be ignored) .

While DAEMO Engineering 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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