Can Hironic (KOSDAQ:149980) Turn Things Around?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Hironic (KOSDAQ:149980), we weren't too upbeat about how things were going.

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. The formula for this calculation on Hironic is:

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

0.017 = ₩721m ÷ (₩46b - ₩3.5b) (Based on the trailing twelve months to September 2020).

Therefore, Hironic has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 13%.

View our latest analysis for Hironic

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 Hironic's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Hironic Tell Us?

In terms of Hironic's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 9.9% 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hironic becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Hironic is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 63% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Hironic does have some risks, we noticed 5 warning signs (and 1 which is a bit concerning) 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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