Namkwang Engineering & Construction (KRX:001260) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Namkwang Engineering & Construction (KRX:001260), it didn't seem to tick all of these boxes.

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Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Namkwang Engineering & Construction is:

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

0.033 = ₩4.6b ÷ (₩401b - ₩260b) (Based on the trailing twelve months to June 2025).

Therefore, Namkwang Engineering & Construction has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 5.6%.

View our latest analysis for Namkwang Engineering & Construction

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

The Trend Of ROCE

On the surface, the trend of ROCE at Namkwang Engineering & Construction doesn't inspire confidence. To be more specific, ROCE has fallen from 6.9% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Namkwang Engineering & Construction's current liabilities are still rather high at 65% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Namkwang Engineering & Construction's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Namkwang Engineering & Construction have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 26% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Namkwang Engineering & Construction does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

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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.