ShinyoungwacoalInc (KRX:005800) May Have Issues Allocating Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into ShinyoungwacoalInc (KRX:005800), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for ShinyoungwacoalInc:

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

0.0016 = ₩515m ÷ (₩373b - ₩46b) (Based on the trailing twelve months to December 2020).

So, ShinyoungwacoalInc has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 7.4%.

Check out our latest analysis for ShinyoungwacoalInc

Historical performance is a great place to start when researching a stock so above you can see the gauge for ShinyoungwacoalInc's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ShinyoungwacoalInc, check out these free graphs here.

What Does the ROCE Trend For ShinyoungwacoalInc Tell Us?

In terms of ShinyoungwacoalInc's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 2.0%, 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. 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 ShinyoungwacoalInc to turn into a multi-bagger.

What We Can Learn From ShinyoungwacoalInc's ROCE

In summary, it's unfortunate that ShinyoungwacoalInc is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 22% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with ShinyoungwacoalInc (including 1 which doesn't sit too well with us) .

While ShinyoungwacoalInc 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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