Be Wary Of Kyung Nong (KRX:002100) And Its Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Kyung Nong (KRX:002100), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Kyung Nong:

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

0.056 = ₩14b ÷ (₩414b - ₩159b) (Based on the trailing twelve months to September 2020).

Thus, Kyung Nong 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%.

See our latest analysis for Kyung Nong

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kyung Nong's ROCE against it's prior returns. If you'd like to look at how Kyung Nong has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Kyung Nong's ROCE Trending?

In terms of Kyung Nong's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 7.1%, 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Kyung Nong becoming one if things continue as they have.

The Bottom Line On Kyung Nong's ROCE

In summary, it's unfortunate that Kyung Nong is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 194% over the last five 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.

Kyung Nong does have some risks, we noticed 3 warning signs (and 2 which are a bit concerning) we think you should know about.

While Kyung Nong 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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