Is This A Sign of Things To Come At Namsun Aluminum (KRX:008350)?

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Namsun Aluminum (KRX:008350), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Namsun Aluminum:

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

0.025 = ₩5.8b ÷ (₩291b - ₩60b) (Based on the trailing twelve months to September 2020).

Thus, Namsun Aluminum has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 4.1%.

See our latest analysis for Namsun Aluminum

Historical performance is a great place to start when researching a stock so above you can see the gauge for Namsun Aluminum's ROCE against it's prior returns. If you're interested in investigating Namsun Aluminum'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 Namsun Aluminum. Unfortunately the returns on capital have diminished from the 6.0% that they were earning two 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 Namsun Aluminum to turn into a multi-bagger.

On a side note, Namsun Aluminum has done well to pay down its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Namsun Aluminum's ROCE

In summary, it's unfortunate that Namsun Aluminum is generating lower returns from the same amount of capital. Since the stock has skyrocketed 331% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Namsun Aluminum we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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