Stock Analysis

Be Wary Of Seondo Electric (KRX:007610) And Its Returns On Capital

KOSE:A007610
Source: Shutterstock

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Seondo Electric (KRX:007610), we weren't too hopeful.

Understanding 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. To calculate this metric for Seondo Electric, this is the formula:

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

0.015 = ₩1.9b ÷ (₩171b - ₩41b) (Based on the trailing twelve months to September 2020).

Thus, Seondo Electric has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 6.5%.

Check out our latest analysis for Seondo Electric

roce
KOSE:A007610 Return on Capital Employed December 17th 2020

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 Seondo Electric 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 Seondo Electric's ROCE Trend?

There is reason to be cautious about Seondo Electric, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 6.1% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. If these trends continue, we wouldn't expect Seondo Electric to turn into a multi-bagger.

What We Can Learn From Seondo Electric's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 32% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Seondo Electric, we've spotted 4 warning signs, and 3 of them can't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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