Some Investors May Be Worried About AminologicsLtd's (KOSDAQ:074430) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, AminologicsLtd (KOSDAQ:074430) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for AminologicsLtd:

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

0.012 = ₩619m ÷ (₩56b - ₩3.2b) (Based on the trailing twelve months to September 2023).

Therefore, AminologicsLtd has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.2%.

See our latest analysis for AminologicsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for AminologicsLtd's ROCE against it's prior returns. If you're interested in investigating AminologicsLtd's past further, check out this free graph covering AminologicsLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For AminologicsLtd Tell Us?

In terms of AminologicsLtd's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 7.1%, however they're now substantially lower than that as we saw above. 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 AminologicsLtd becoming one if things continue as they have.

In Conclusion...

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. Investors haven't taken kindly to these developments, since the stock has declined 15% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 2 warning signs with AminologicsLtd (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.