Be Wary Of Chinyang Chemical (KRX:051630) And Its Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Chinyang Chemical (KRX:051630), so let's see why.

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. The formula for this calculation on Chinyang Chemical is:

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

0.0065 = ₩196m ÷ (₩38b - ₩8.0b) (Based on the trailing twelve months to December 2020).

Therefore, Chinyang Chemical has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.6%.

Check out our latest analysis for Chinyang Chemical

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

So How Is Chinyang Chemical's ROCE Trending?

There is reason to be cautious about Chinyang Chemical, given the returns are trending downwards. About five years ago, returns on capital were 8.5%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Chinyang Chemical becoming one if things continue as they have.

Our Take On Chinyang Chemical's ROCE

In summary, it's unfortunate that Chinyang Chemical is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 14% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Chinyang Chemical does have some risks, we noticed 4 warning signs (and 1 which is potentially serious) we think you should know about.

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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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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