KEPCO Engineering & Construction Company (KRX:052690) Could Be At Risk Of Shrinking As A Company

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. On that note, looking into KEPCO Engineering & Construction Company (KRX:052690), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

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 KEPCO Engineering & Construction Company:

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

0.054 = ₩30b ÷ (₩874b - ₩318b) (Based on the trailing twelve months to September 2024).

Thus, KEPCO Engineering & Construction Company has an ROCE of 5.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.4%.

Check out our latest analysis for KEPCO Engineering & Construction Company

Above you can see how the current ROCE for KEPCO Engineering & Construction Company compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering KEPCO Engineering & Construction Company for free.

What Does the ROCE Trend For KEPCO Engineering & Construction Company Tell Us?

There is reason to be cautious about KEPCO Engineering & Construction Company, given the returns are trending downwards. To be more specific, the ROCE was 9.5% four years ago, but since then it has dropped noticeably. 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 four years. If these trends continue, we wouldn't expect KEPCO Engineering & Construction Company to turn into a multi-bagger.

On a side note, KEPCO Engineering & Construction Company's current liabilities have increased over the last four years to 36% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From KEPCO Engineering & Construction Company's ROCE

In summary, it's unfortunate that KEPCO Engineering & Construction Company is generating lower returns from the same amount of capital. Since the stock has skyrocketed 397% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you're still interested in KEPCO Engineering & Construction Company it's worth checking out our FREE intrinsic value approximation for A052690 to see if it's trading at an attractive price in other respects.

While KEPCO Engineering & Construction Company 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.