Picogram.co.Ltd's (KOSDAQ:376180) Returns On Capital Tell Us There Is Reason To Feel Uneasy

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Picogram.co.Ltd (KOSDAQ:376180), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Picogram.co.Ltd:

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

0.034 = ₩1.1b ÷ (₩74b - ₩42b) (Based on the trailing twelve months to September 2023).

Thus, Picogram.co.Ltd has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 6.3%.

See our latest analysis for Picogram.co.Ltd

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

What Can We Tell From Picogram.co.Ltd's ROCE Trend?

In terms of Picogram.co.Ltd's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 13% that they were earning one year ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Picogram.co.Ltd becoming one if things continue as they have.

On a side note, Picogram.co.Ltd's current liabilities have increased over the last one year to 56% 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. 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 Key Takeaway

In summary, it's unfortunate that Picogram.co.Ltd is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last year have experienced a 63% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Picogram.co.Ltd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.