Here's What We Make Of Kyungin Electronics' (KRX:009140) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. 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. In light of that, from a first glance at Kyungin Electronics (KRX:009140), we've spotted some signs that it could be struggling, so let's investigate.

What is 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 Kyungin Electronics, this is the formula:

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

0.0073 = ₩417m ÷ (₩61b - ₩3.9b) (Based on the trailing twelve months to September 2020).

So, Kyungin Electronics has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 7.8%.

Check out our latest analysis for Kyungin Electronics

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

What Does the ROCE Trend For Kyungin Electronics Tell Us?

There is reason to be cautious about Kyungin Electronics, given the returns are trending downwards. About five years ago, returns on capital were 3.2%, 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 Kyungin Electronics becoming one if things continue as they have.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Despite the concerning underlying trends, the stock has actually gained 39% 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.

On a final note, we found 3 warning signs for Kyungin Electronics (1 is significant) you should be aware of.

While Kyungin Electronics 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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This article by Simply Wall St is general in nature. 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.
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