When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Zinus (KRX:013890), the trends above didn't look too great.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Zinus:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = ₩87b ÷ (₩897b - ₩392b) (Based on the trailing twelve months to December 2020).
Thus, Zinus has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 9.4% it's much better.
In the above chart we have measured Zinus' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
There is reason to be cautious about Zinus, given the returns are trending downwards. To be more specific, the ROCE was 23% one year ago, but since then it has dropped noticeably. 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 Zinus to turn into a multi-bagger.
Another thing to note, Zinus has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Zinus' ROCE
In summary, it's unfortunate that Zinus is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 83% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you'd like to know more about Zinus, we've spotted 5 warning signs, and 2 of them are a bit concerning.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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