Di Dong Il (KRX:001530) Could Be At Risk Of Shrinking As A Company

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. Having said that, after a brief look, Di Dong Il (KRX:001530) we aren't filled with optimism, but let's investigate further.

We've discovered 2 warning signs about Di Dong Il. View them for free.

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. To calculate this metric for Di Dong Il, this is the formula:

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

0.012 = ₩7.8b ÷ (₩1.0t - ₩338b) (Based on the trailing twelve months to December 2024).

Thus, Di Dong Il has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.7%.

Check out our latest analysis for Di Dong Il

Above you can see how the current ROCE for Di Dong Il compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Di Dong Il for free.

What Can We Tell From Di Dong Il's ROCE Trend?

There is reason to be cautious about Di Dong Il, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 2.8% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Di Dong Il becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Di Dong Il is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 601%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 2 warning signs for Di Dong Il (1 is a bit unpleasant) you should be aware of.

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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.