Silla TextileLtd (KOSDAQ:001000) Will Be Hoping To Turn Its Returns On Capital Around

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Silla TextileLtd (KOSDAQ:001000), 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 Silla TextileLtd:

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

0.026 = ₩386m ÷ (₩32b - ₩17b) (Based on the trailing twelve months to September 2023).

So, Silla TextileLtd has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 9.0%.

View our latest analysis for Silla TextileLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Silla TextileLtd's ROCE against it's prior returns. If you'd like to look at how Silla TextileLtd has performed in the past in other metrics, you can view this free graph of Silla TextileLtd's past earnings, revenue and cash flow.

So How Is Silla TextileLtd's ROCE Trending?

In terms of Silla TextileLtd's historical ROCE trend, it isn't fantastic. The company used to generate 3.4% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 27% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 53%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.6%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

In summary, it's unfortunate that Silla TextileLtd is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 37% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Silla TextileLtd (including 2 which are a bit concerning) .

While Silla TextileLtd 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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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.