Returns On Capital Signal Difficult Times Ahead For Eagon Industrial (KRX:008250)

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Eagon Industrial (KRX:008250), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Eagon Industrial:

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

0.022 = ₩5.8b ÷ (₩383b - ₩119b) (Based on the trailing twelve months to December 2020).

Therefore, Eagon Industrial has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 5.5%.

View our latest analysis for Eagon Industrial

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

What Does the ROCE Trend For Eagon Industrial Tell Us?

We are a bit worried about the trend of returns on capital at Eagon Industrial. To be more specific, the ROCE was 5.9% five years ago, but since then it has dropped noticeably. 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 Eagon Industrial to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Eagon Industrial is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 0.9% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Eagon Industrial, we've spotted 4 warning signs, and 1 of them can't be ignored.

While Eagon Industrial 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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