Be Wary Of KyungbangLtd (KRX:000050) And Its Returns On Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount 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. On that note, looking into KyungbangLtd (KRX:000050), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for KyungbangLtd:

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

0.022 = ₩22b ÷ (₩1.3t - ₩286b) (Based on the trailing twelve months to December 2020).

So, KyungbangLtd has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Luxury industry average of 7.4%.

View our latest analysis for KyungbangLtd

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 want to delve into the historical earnings, revenue and cash flow of KyungbangLtd, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of KyungbangLtd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.4%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 KyungbangLtd becoming one if things continue as they have.

Our Take On KyungbangLtd's ROCE

In summary, it's unfortunate that KyungbangLtd is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 22% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing KyungbangLtd, we've discovered 3 warning signs that you should be aware of.

While KyungbangLtd 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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