How Well Is Manho Rope & Wire (KRX:001080) Allocating Its Capital?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Manho Rope & Wire (KRX:001080), the trends above didn't look too great.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Manho Rope & Wire is:

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

0.0021 = ₩495m ÷ (₩252b - ₩17b) (Based on the trailing twelve months to December 2020).

Thus, Manho Rope & Wire has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 4.1%.

View our latest analysis for Manho Rope & Wire

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 Manho Rope & Wire's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Manho Rope & Wire's ROCE Trend?

There is reason to be cautious about Manho Rope & Wire, given the returns are trending downwards. To be more specific, the ROCE was 2.8% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Manho Rope & Wire to turn into a multi-bagger.

The Bottom Line On Manho Rope & Wire's ROCE

In summary, it's unfortunate that Manho Rope & Wire is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 2.1% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Manho Rope & Wire (of which 1 is concerning!) that you should know about.

While Manho Rope & Wire 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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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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