KEPCO Engineering & Construction Company (KRX:052690) Is Finding It Tricky To Allocate Its Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at KEPCO Engineering & Construction Company (KRX:052690), so let's see why.

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)

0.047 = ₩28b ÷ (₩881b - ₩290b) (Based on the trailing twelve months to March 2024).

Thus, KEPCO Engineering & Construction Company has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.0%.

View 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're interested, you can view the analysts predictions in our free analyst report for KEPCO Engineering & Construction Company .

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at KEPCO Engineering & Construction Company. About five years ago, returns on capital were 8.8%, however they're now substantially lower than that as we saw above. 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 KEPCO Engineering & Construction Company to turn into a multi-bagger.

The Bottom Line On KEPCO Engineering & Construction Company's ROCE

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. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 344%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

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.

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. 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.

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