Is Dongil Steel Mfg.Ltd (KRX:002690) Headed For Trouble?

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Dongil Steel Mfg.Ltd (KRX:002690), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Dongil Steel Mfg.Ltd is:

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

0.0075 = ₩985m ÷ (₩145b - ₩13b) (Based on the trailing twelve months to September 2020).

Thus, Dongil Steel Mfg.Ltd has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 4.1%.

See our latest analysis for Dongil Steel Mfg.Ltd

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 Dongil Steel Mfg.Ltd's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Dongil Steel Mfg.Ltd. Unfortunately the returns on capital have diminished from the 7.3% 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. 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 Dongil Steel Mfg.Ltd to turn into a multi-bagger.

What We Can Learn From Dongil Steel Mfg.Ltd's ROCE

In summary, it's unfortunate that Dongil Steel Mfg.Ltd is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Dongil Steel Mfg.Ltd we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Dongil Steel Mfg.Ltd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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