Is Samhwa Paints Industrial (KRX:000390) Headed For Trouble?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. 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 Samhwa Paints Industrial (KRX:000390), so let's see why.

Understanding Return On Capital Employed (ROCE)

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 Samhwa Paints Industrial:

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

0.04 = ₩13b ÷ (₩557b - ₩239b) (Based on the trailing twelve months to September 2020).

Thus, Samhwa Paints Industrial has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.2%.

Check out our latest analysis for Samhwa Paints Industrial

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 Samhwa Paints Industrial's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Samhwa Paints Industrial's ROCE Trending?

In terms of Samhwa Paints Industrial's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 8.9% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Samhwa Paints Industrial becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 43%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Samhwa Paints Industrial's ROCE

In summary, it's unfortunate that Samhwa Paints Industrial 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 32% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Samhwa Paints Industrial (including 2 which is are significant) .

While Samhwa Paints Industrial 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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