Is This A Sign of Things To Come At Dongil Steel Mfg.Ltd (KRX:002690)?

What underlying fundamental trends can indicate that a company might be in decline? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Dongil Steel Mfg.Ltd (KRX:002690), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Dongil Steel Mfg.Ltd, this is the formula:

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%.

Check out our latest analysis for Dongil Steel Mfg.Ltd

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

How Are Returns Trending?

In terms of Dongil Steel Mfg.Ltd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.3% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Dongil Steel Mfg.Ltd becoming one if things continue as they have.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 25% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Dongil Steel Mfg.Ltd (including 1 which is can't be ignored) .

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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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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