Some Investors May Be Worried About Busan Industrial's (KRX:011390) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Busan Industrial (KRX:011390) and its ROCE trend, we weren't exactly thrilled.

What Is 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. To calculate this metric for Busan Industrial, this is the formula:

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

0.019 = ₩5.5b ÷ (₩334b - ₩44b) (Based on the trailing twelve months to June 2024).

Thus, Busan Industrial has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 9.1%.

Check out our latest analysis for Busan Industrial

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

The Trend Of ROCE

In terms of Busan Industrial's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.8%, but since then they've fallen to 1.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Busan Industrial has decreased its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, we're somewhat concerned by Busan Industrial's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Busan Industrial we've found 5 warning signs (3 make us uncomfortable!) that you should be aware of before investing here.

While Busan 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.