Kyeryong Construction Industrial (KRX:013580) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Kyeryong Construction Industrial (KRX:013580) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Kyeryong Construction Industrial:

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

0.089 = ₩143b ÷ (₩3.0t - ₩1.4t) (Based on the trailing twelve months to September 2024).

Therefore, Kyeryong Construction Industrial has an ROCE of 8.9%. On its own that's a low return, but compared to the average of 6.6% generated by the Construction industry, it's much better.

Check out our latest analysis for Kyeryong Construction Industrial

In the above chart we have measured Kyeryong Construction Industrial's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Kyeryong Construction Industrial for free.

What Does the ROCE Trend For Kyeryong Construction Industrial Tell Us?

In terms of Kyeryong Construction Industrial's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.9% from 19% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Kyeryong Construction Industrial has done well to pay down its current liabilities to 46% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Kyeryong Construction Industrial's ROCE

To conclude, we've found that Kyeryong Construction Industrial is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 22% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 5 warning signs we've spotted with Kyeryong Construction Industrial (including 2 which can't be ignored) .

While Kyeryong Construction Industrial 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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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.