Is Lock&Lock (KRX:115390) Set To Make A Turnaround?

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Lock&Lock (KRX:115390) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Lock&Lock:

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

0.035 = ₩25b ÷ (₩798b - ₩65b) (Based on the trailing twelve months to September 2020).

Therefore, Lock&Lock has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.3%.

Check out our latest analysis for Lock&Lock

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lock&Lock's ROCE against it's prior returns. If you'd like to look at how Lock&Lock has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Lock&Lock. About five years ago, returns on capital were 4.4%, 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. 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 Lock&Lock to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Lock&Lock is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Lock&Lock does have some risks though, and we've spotted 1 warning sign for Lock&Lock that you might be interested in.

While Lock&Lock isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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