LTCLtd (KOSDAQ:170920) Could Be Struggling To Allocate 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. 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 glancing at the trends within LTCLtd (KOSDAQ:170920), we weren't too hopeful.

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

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. To calculate this metric for LTCLtd, this is the formula:

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

0.0029 = ₩336m ÷ (₩166b - ₩52b) (Based on the trailing twelve months to December 2020).

So, LTCLtd has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.9%.

Check out our latest analysis for LTCLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for LTCLtd's ROCE against it's prior returns. If you'd like to look at how LTCLtd 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 LTCLtd, 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. 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. If these trends continue, we wouldn't expect LTCLtd to turn into a multi-bagger.

What We Can Learn From LTCLtd's ROCE

In summary, it's unfortunate that LTCLtd is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 22% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 6 warning signs we've spotted with LTCLtd (including 2 which are a bit concerning) .

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. 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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