Some Investors May Be Worried About Keum Kang Steel's (KOSDAQ:053260) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Keum Kang Steel (KOSDAQ:053260), so let's see why.

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. Analysts use this formula to calculate it for Keum Kang Steel:

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

0.028 = ₩3.2b ÷ (₩139b - ₩26b) (Based on the trailing twelve months to December 2020).

Therefore, Keum Kang Steel has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 4.7%.

See our latest analysis for Keum Kang Steel

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

What Does the ROCE Trend For Keum Kang Steel Tell Us?

We are a bit worried about the trend of returns on capital at Keum Kang Steel. To be more specific, the ROCE was 4.0% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. If these trends continue, we wouldn't expect Keum Kang Steel to turn into a multi-bagger.

Our Take On Keum Kang Steel's ROCE

In summary, it's unfortunate that Keum Kang Steel is generating lower returns from the same amount of capital. Since the stock has skyrocketed 105% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Keum Kang Steel (including 1 which makes us a bit uncomfortable) .

While Keum Kang Steel may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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