Some Investors May Be Worried About Wonpoong's (KOSDAQ:008370) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Wonpoong (KOSDAQ:008370), we weren't too upbeat about how things were going.

What is 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 Wonpoong:

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

0.054 = ₩4.2b ÷ (₩85b - ₩7.2b) (Based on the trailing twelve months to December 2020).

Thus, Wonpoong has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Luxury industry average of 7.4%.

View our latest analysis for Wonpoong

Historical performance is a great place to start when researching a stock so above you can see the gauge for Wonpoong's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Wonpoong, check out these free graphs here.

The Trend Of ROCE

In terms of Wonpoong's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Wonpoong becoming one if things continue as they have.

Our Take On Wonpoong's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 86% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Wonpoong (including 1 which makes us a bit uncomfortable) .

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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