Dongkuk Refractories & Steel (KOSDAQ:075970) Is Finding It Tricky To Allocate Its Capital

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. 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Dongkuk Refractories & Steel (KOSDAQ:075970), the trends above didn't look too great.

Understanding 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 Dongkuk Refractories & Steel:

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

0.022 = ₩1.9b ÷ (₩126b - ₩40b) (Based on the trailing twelve months to December 2023).

Thus, Dongkuk Refractories & Steel has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 7.6%.

See our latest analysis for Dongkuk Refractories & Steel

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 Dongkuk Refractories & Steel has performed in the past in other metrics, you can view this free graph of Dongkuk Refractories & Steel's past earnings, revenue and cash flow.

What Can We Tell From Dongkuk Refractories & Steel's ROCE Trend?

There is reason to be cautious about Dongkuk Refractories & Steel, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 6.3% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Dongkuk Refractories & Steel becoming one if things continue as they have.

What We Can Learn From Dongkuk Refractories & Steel's ROCE

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. Yet despite these concerning fundamentals, the stock has performed strongly with a 54% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 4 warning signs for Dongkuk Refractories & Steel (2 make us uncomfortable) you should be aware of.

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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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.