Is Samjung Pulp (KRX:009770) Set To Make A Turnaround?

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Samjung Pulp (KRX:009770), the trends above didn't look too great.

Understanding 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. The formula for this calculation on Samjung Pulp is:

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

0.0072 = ₩1.4b ÷ (₩205b - ₩16b) (Based on the trailing twelve months to September 2019).

Therefore, Samjung Pulp has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Forestry industry average of 5.2%.

View our latest analysis for Samjung Pulp

Historical performance is a great place to start when researching a stock so above you can see the gauge for Samjung Pulp's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Samjung Pulp, check out these free graphs here.

What Can We Tell From Samjung Pulp's ROCE Trend?

There is reason to be cautious about Samjung Pulp, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 6.6% that they were earning three years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 three years. If these trends continue, we wouldn't expect Samjung Pulp to turn into a multi-bagger.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 11% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Samjung Pulp does have some risks, we noticed 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Samjung Pulp isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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