SeAH Steel Holdings (KRX:003030) Has Some Difficulty Using Its Capital Effectively

What financial metrics can indicate to us that a company is maturing or even 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into SeAH Steel Holdings (KRX:003030), the trends above didn't look too great.

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 SeAH Steel Holdings:

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

0.041 = ₩67b ÷ (₩2.3t - ₩671b) (Based on the trailing twelve months to December 2020).

Therefore, SeAH Steel Holdings has an ROCE of 4.1%. On its own, that's a low figure but it's around the 4.7% average generated by the Metals and Mining industry.

View our latest analysis for SeAH Steel Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for SeAH Steel Holdings' ROCE against it's prior returns. If you're interested in investigating SeAH Steel Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For SeAH Steel Holdings Tell Us?

We are a bit worried about the trend of returns on capital at SeAH Steel Holdings. Unfortunately the returns on capital have diminished from the 5.3% 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect SeAH Steel Holdings to turn into a multi-bagger.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these poor fundamentals, the stock has gained a huge 164% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with SeAH Steel Holdings (including 1 which is a bit unpleasant) .

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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