Returns On Capital Tell Us A Lot About Seondo Electric (KRX:007610)

What underlying fundamental trends can indicate that a company might be in decline? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Seondo Electric (KRX:007610), so let's see why.

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. Analysts use this formula to calculate it for Seondo Electric:

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).

Therefore, 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 6.9%.

View our latest analysis for Seondo Electric

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

So How Is Seondo Electric's ROCE Trending?

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. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Seondo Electric becoming one if things continue as they have.

The Bottom Line On Seondo Electric's ROCE

In summary, it's unfortunate that Seondo Electric is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 49% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Seondo Electric does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those can't be ignored...

While Seondo Electric isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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