Returns On Capital Signal Difficult Times Ahead For KEPCO Engineering & Construction Company (KRX:052690)

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into KEPCO Engineering & Construction Company (KRX:052690), we weren't too upbeat about how things were going.

What Is 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. The formula for this calculation on KEPCO Engineering & Construction Company is:

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%. Even though it's in line with the industry average of 5.4%, it's still a low return by itself.

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 .

What Can We Tell From KEPCO Engineering & Construction Company's ROCE Trend?

We are a bit worried about the trend of returns on capital at KEPCO Engineering & Construction Company. About four years ago, returns on capital were 9.5%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. 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.

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. Yet despite these poor fundamentals, the stock has gained a huge 282% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

While KEPCO Engineering & Construction Company doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for A052690 on our platform.

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.