What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining 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. So after glancing at the trends within Willbes (KRX:008600), we weren't too hopeful.
Understanding 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. To calculate this metric for Willbes, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = ₩2.3b ÷ (₩285b - ₩163b) (Based on the trailing twelve months to December 2020).
Therefore, Willbes has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Luxury industry average of 7.4%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Willbes' ROCE against it's prior returns. If you're interested in investigating Willbes' past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We aren't inspired by the trend, given ROCE has reduced by 68% over the last five years and Willbes is applying -26% less capital in the business, even after the capital raising they conducted (prior to their latest reported figures).
On a side note, Willbes' current liabilities have increased over the last five years to 57% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.9%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
The Key Takeaway
To see Willbes reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 25% 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.
On a final note, we found 2 warning signs for Willbes (1 can't be ignored) you should be aware of.
While Willbes may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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The Willbes & Co., Ltd. manufactures and sells apparel in South Korea.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
Read more about these checks in the individual report sections or in our analysis model.
Adequate balance sheet and slightly overvalued.
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