Returns On Capital At Hwacheon Machine Tool (KRX:000850) Paint A Concerning Picture

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Hwacheon Machine Tool (KRX:000850), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Hwacheon Machine Tool:

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

0.0043 = ₩1.4b ÷ (₩378b - ₩46b) (Based on the trailing twelve months to December 2020).

So, Hwacheon Machine Tool has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.5%.

See our latest analysis for Hwacheon Machine Tool

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

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Hwacheon Machine Tool. To be more specific, the ROCE was 3.7% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 five years. If these trends continue, we wouldn't expect Hwacheon Machine Tool to turn into a multi-bagger.

Our Take On Hwacheon Machine Tool's ROCE

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 35% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

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

While Hwacheon Machine Tool 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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