Are Investors Concerned With What's Going On At Paik Kwang Industrial (KRX:001340)?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Paik Kwang Industrial (KRX:001340), the trends above didn't look too great.

What is 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. To calculate this metric for Paik Kwang Industrial, this is the formula:

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

0.056 = ₩13b ÷ (₩326b - ₩89b) (Based on the trailing twelve months to September 2020).

Therefore, Paik Kwang Industrial has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.0%.

View our latest analysis for Paik Kwang Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Paik Kwang Industrial's ROCE against it's prior returns. If you'd like to look at how Paik Kwang Industrial 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 Paik Kwang Industrial, given the returns are trending downwards. To be more specific, the ROCE was 11% one year ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Paik Kwang Industrial to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Paik Kwang Industrial is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 134%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Paik Kwang Industrial does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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