The Returns On Capital At Daewon Cable (KRX:006340) Don't Inspire Confidence

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Daewon Cable (KRX:006340), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Daewon Cable is:

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

0.016 = ₩1.6b ÷ (₩195b - ₩97b) (Based on the trailing twelve months to September 2020).

So, Daewon Cable has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 7.2%.

See our latest analysis for Daewon Cable

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'd like to look at how Daewon Cable has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Daewon Cable's ROCE Trend?

There is reason to be cautious about Daewon Cable, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.5% 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 Daewon Cable becoming one if things continue as they have.

On a separate but related note, it's important to know that Daewon Cable has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

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 57% 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.

One more thing: We've identified 2 warning signs with Daewon Cable (at least 1 which is concerning) , and understanding them would certainly be useful.

While Daewon Cable 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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