Here's What To Make Of BAIKSAN Co's (KRX:035150) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at BAIKSAN Co (KRX:035150), it didn't seem to tick all of these boxes.

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 BAIKSAN Co, this is the formula:

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

0.0097 = ₩1.6b ÷ (₩319b - ₩150b) (Based on the trailing twelve months to September 2020).

So, BAIKSAN Co has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Luxury industry average of 7.4%.

View our latest analysis for BAIKSAN Co

Historical performance is a great place to start when researching a stock so above you can see the gauge for BAIKSAN Co's ROCE against it's prior returns. If you're interested in investigating BAIKSAN Co's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From BAIKSAN Co's ROCE Trend?

On the surface, the trend of ROCE at BAIKSAN Co doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 1.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, BAIKSAN Co's current liabilities have increased over the last five years to 47% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.0%. 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.

What We Can Learn From BAIKSAN Co's ROCE

We're a bit apprehensive about BAIKSAN Co because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 44% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

BAIKSAN Co does have some risks, we noticed 4 warning signs (and 2 which are potentially serious) 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. 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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