The Returns On Capital At Shinjin SmLtd (KOSDAQ:138070) Don't Inspire Confidence

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. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Shinjin SmLtd (KOSDAQ:138070), so let's see why.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Shinjin SmLtd:

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

0.012 = ₩1.0b ÷ (₩114b - ₩25b) (Based on the trailing twelve months to September 2020).

Thus, Shinjin SmLtd has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 4.6%.

Check out our latest analysis for Shinjin SmLtd

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 Shinjin SmLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Shinjin SmLtd, given the returns are trending downwards. About five years ago, returns on capital were 8.3%, 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. If these trends continue, we wouldn't expect Shinjin SmLtd to turn into a multi-bagger.

The Bottom Line On Shinjin SmLtd's ROCE

In summary, it's unfortunate that Shinjin SmLtd is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 49% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Shinjin SmLtd does have some risks, we noticed 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

While Shinjin SmLtd 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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