Zero to Seven (KOSDAQ:159580) Is Finding It Tricky To Allocate Its Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 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 Zero to Seven (KOSDAQ:159580), we've spotted some signs that it could be struggling, so let's investigate.

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 Zero to Seven:

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

0.01 = ₩830m ÷ (₩92b - ₩11b) (Based on the trailing twelve months to September 2024).

So, Zero to Seven has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Luxury industry average of 8.0%.

Check out our latest analysis for Zero to Seven

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zero to Seven's ROCE against it's prior returns. If you're interested in investigating Zero to Seven's past further, check out this free graph covering Zero to Seven's past earnings, revenue and cash flow.

So How Is Zero to Seven's ROCE Trending?

There is reason to be cautious about Zero to Seven, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Zero to Seven to turn into a multi-bagger.

On a related note, Zero to Seven has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Zero to Seven's ROCE

In summary, it's unfortunate that Zero to Seven is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 44% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Zero to Seven we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

While Zero to Seven 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.