SAMICK MUSICAL INSTRUMENT (KRX:002450) Is Finding It Tricky To Allocate Its Capital

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 to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at SAMICK MUSICAL INSTRUMENT (KRX:002450), so let's see why.

What Is 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. The formula for this calculation on SAMICK MUSICAL INSTRUMENT is:

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

0.017 = ₩6.5b ÷ (₩499b - ₩110b) (Based on the trailing twelve months to September 2024).

Therefore, SAMICK MUSICAL INSTRUMENT has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Leisure industry average of 11%.

Check out our latest analysis for SAMICK MUSICAL INSTRUMENT

Historical performance is a great place to start when researching a stock so above you can see the gauge for SAMICK MUSICAL INSTRUMENT's ROCE against it's prior returns. If you'd like to look at how SAMICK MUSICAL INSTRUMENT has performed in the past in other metrics, you can view this free graph of SAMICK MUSICAL INSTRUMENT's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of SAMICK MUSICAL INSTRUMENT's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.4% five years ago, but since then it has dropped noticeably. 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. If these trends continue, we wouldn't expect SAMICK MUSICAL INSTRUMENT to turn into a multi-bagger.

The Bottom Line On SAMICK MUSICAL INSTRUMENT's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 1.6% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

SAMICK MUSICAL INSTRUMENT does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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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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.