Does Changhae Ethanol's (KOSDAQ:004650) Returns On Capital Reflect Well On The Business?

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Changhae Ethanol (KOSDAQ:004650) we aren't filled with optimism, but let's investigate further.

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 Changhae Ethanol:

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

0.033 = ₩4.5b ÷ (₩194b - ₩57b) (Based on the trailing twelve months to September 2020).

Therefore, Changhae Ethanol has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.9%.

Check out our latest analysis for Changhae Ethanol

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'd like to look at how Changhae Ethanol has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Changhae Ethanol's ROCE Trending?

In terms of Changhae Ethanol's historical ROCE trend, it isn't fantastic. The company used to generate 11% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 33% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line On Changhae Ethanol's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. It should come as no surprise then that the stock has fallen 37% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Changhae Ethanol, you might be interested to know about the 3 warning signs that our analysis has discovered.

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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