What Joong Ang Enervis' (KOSDAQ:000440) Returns On Capital Can Tell Us

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. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Joong Ang Enervis (KOSDAQ:000440), we've spotted some signs that it could be struggling, so let's investigate.

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 Joong Ang Enervis:

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

0.0069 = ₩317m ÷ (₩59b - ₩13b) (Based on the trailing twelve months to September 2020).

Thus, Joong Ang Enervis has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 5.3%.

Check out our latest analysis for Joong Ang Enervis

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Joong Ang Enervis' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Joong Ang Enervis, given the returns are trending downwards. To be more specific, the ROCE was 4.2% five years ago, but since then it has dropped noticeably. 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. If these trends continue, we wouldn't expect Joong Ang Enervis to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Joong Ang Enervis is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 69% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Joong Ang Enervis does have some risks, we noticed 5 warning signs (and 1 which is concerning) 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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