Be Wary Of Kyungdong Invest (KRX:012320) 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Kyungdong Invest (KRX:012320), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

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 Kyungdong Invest, this is the formula:

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

0.035 = ₩19b ÷ (₩607b - ₩70b) (Based on the trailing twelve months to March 2024).

Therefore, Kyungdong Invest has an ROCE of 3.5%. On its own, that's a low figure but it's around the 3.7% average generated by the Oil and Gas industry.

See our latest analysis for Kyungdong Invest

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 Kyungdong Invest's past further, check out this free graph covering Kyungdong Invest's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Kyungdong Invest's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.7% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Kyungdong Invest to turn into a multi-bagger.

What We Can Learn From Kyungdong Invest's ROCE

In summary, it's unfortunate that Kyungdong Invest is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 144% 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.

On a separate note, we've found 1 warning sign for Kyungdong Invest you'll probably want to know about.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.