Returns On Capital At Samhyun Steel (KOSDAQ:017480) Paint A Concerning Picture

What underlying fundamental trends can indicate that a company might be 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Samhyun Steel (KOSDAQ:017480), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

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 Samhyun Steel is:

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

0.045 = ₩6.9b ÷ (₩172b - ₩21b) (Based on the trailing twelve months to September 2020).

Thus, Samhyun Steel has an ROCE of 4.5%. On its own, that's a low figure but it's around the 4.1% average generated by the Metals and Mining industry.

See our latest analysis for Samhyun Steel

Historical performance is a great place to start when researching a stock so above you can see the gauge for Samhyun Steel's ROCE against it's prior returns. If you'd like to look at how Samhyun Steel has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Samhyun Steel. To be more specific, the ROCE was 6.2% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Samhyun Steel becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Samhyun Steel is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 24% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know about the risks facing Samhyun Steel, we've discovered 1 warning sign that you should be aware of.

While Samhyun Steel 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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