Cosmax BTI (KRX:044820) Is Finding It Tricky To Allocate Its Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Cosmax BTI (KRX:044820), the trends above didn't look too great.

What is 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. To calculate this metric for Cosmax BTI, this is the formula:

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

0.0026 = ₩1.2b ÷ (₩882b - ₩424b) (Based on the trailing twelve months to December 2020).

Therefore, Cosmax BTI has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 6.7%.

See our latest analysis for Cosmax BTI

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

So How Is Cosmax BTI's ROCE Trending?

We are a bit worried about the trend of returns on capital at Cosmax BTI. Unfortunately the returns on capital have diminished from the 2.7% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Cosmax BTI becoming one if things continue as they have.

On a side note, Cosmax BTI's current liabilities have increased over the last five years to 48% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.3%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 66% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Cosmax BTI, we've spotted 3 warning signs, and 2 of them are significant.

While Cosmax BTI 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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