Shinwha Intertek (KOSDAQ:056700) Has Some Difficulty Using Its Capital Effectively

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Shinwha Intertek (KOSDAQ:056700), the trends above didn't look too great.

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Understanding Return On Capital Employed (ROCE)

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 Shinwha Intertek:

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

0.061 = ₩5.8b ÷ (₩189b - ₩94b) (Based on the trailing twelve months to December 2024).

Thus, Shinwha Intertek has an ROCE of 6.1%. On its own, that's a low figure but it's around the 7.1% average generated by the Chemicals industry.

View our latest analysis for Shinwha Intertek

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

What Does the ROCE Trend For Shinwha Intertek Tell Us?

In terms of Shinwha Intertek's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 16% 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. 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 Shinwha Intertek to turn into a multi-bagger.

On a separate but related note, it's important to know that Shinwha Intertek has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Shinwha Intertek's ROCE

In summary, it's unfortunate that Shinwha Intertek is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 23% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Shinwha Intertek, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While Shinwha Intertek 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.