Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Moorim Paper (KRX:009200) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for Moorim Paper, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = ₩50b ÷ (₩2.2t - ₩734b) (Based on the trailing twelve months to September 2020).
So, Moorim Paper has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Forestry industry average of 5.2%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Moorim Paper's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Moorim Paper, check out these free graphs here.
The Trend Of ROCE
In terms of Moorim Paper's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 5.2% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a side note, Moorim Paper has done well to pay down its current liabilities to 33% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From Moorim Paper's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Moorim Paper have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 8.3% return to shareholders who held over 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 Moorim Paper, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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