Returns On Capital At KOREA CEMENT (KOSDAQ:198440) Paint A Concerning Picture

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into KOREA CEMENT (KOSDAQ:198440), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for KOREA CEMENT, this is the formula:

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

0.0025 = ₩256m ÷ (₩115b - ₩13b) (Based on the trailing twelve months to September 2020).

Thus, KOREA CEMENT has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 3.4%.

See our latest analysis for KOREA CEMENT

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're interested in investigating KOREA CEMENT's past further, check out 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 KOREA CEMENT, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 7.0% that they were earning three years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 KOREA CEMENT to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 96% return over the last three 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for KOREA CEMENT (of which 1 can't be ignored!) that you should know about.

While KOREA CEMENT 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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