Is iMarketKorea (KRX:122900) Struggling?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at iMarketKorea (KRX:122900), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for iMarketKorea:

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

0.095 = ₩45b ÷ (₩1.1t - ₩629b) (Based on the trailing twelve months to September 2020).

So, iMarketKorea has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Trade Distributors industry average of 4.4%.

Check out our latest analysis for iMarketKorea

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how iMarketKorea has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is iMarketKorea's ROCE Trending?

There is reason to be cautious about iMarketKorea, given the returns are trending downwards. About five years ago, returns on capital were 13%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on iMarketKorea becoming one if things continue as they have.

Another thing to note, iMarketKorea has a high ratio of current liabilities to total assets of 57%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On iMarketKorea'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. Investors haven't taken kindly to these developments, since the stock has declined 53% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for iMarketKorea (of which 1 shouldn't be ignored!) that you should know about.

While iMarketKorea 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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