Are Investors Concerned With What's Going On At Chinyang Poly UrethaneLtd (KRX:010640)?

What underlying fundamental trends can indicate that a company might be in decline? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Chinyang Poly UrethaneLtd (KRX:010640) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Chinyang Poly UrethaneLtd is:

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

0.068 = ₩2.5b ÷ (₩44b - ₩7.6b) (Based on the trailing twelve months to September 2020).

Therefore, Chinyang Poly UrethaneLtd has an ROCE of 6.8%. On its own, that's a low figure but it's around the 8.0% average generated by the Chemicals industry.

View our latest analysis for Chinyang Poly UrethaneLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chinyang Poly UrethaneLtd's ROCE against it's prior returns. If you'd like to look at how Chinyang Poly UrethaneLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Chinyang Poly UrethaneLtd. To be more specific, the ROCE was 11% one year ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Chinyang Poly UrethaneLtd to turn into a multi-bagger.

What We Can Learn From Chinyang Poly UrethaneLtd's ROCE

In summary, it's unfortunate that Chinyang Poly UrethaneLtd is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 132%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 3 warning signs we've spotted with Chinyang Poly UrethaneLtd (including 1 which is concerning) .

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.

If you’re looking to trade Chinyang Poly UrethaneLtd, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.