Should You Be Worried About POSCO COATED & COLOR STEEL's (KRX:058430) Returns On Capital?

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into POSCO COATED & COLOR STEEL (KRX:058430), we weren't too upbeat about how things were going.

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 POSCO COATED & COLOR STEEL, this is the formula:

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

0.066 = ₩17b ÷ (₩485b - ₩230b) (Based on the trailing twelve months to December 2020).

Thus, POSCO COATED & COLOR STEEL has an ROCE of 6.6%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 4.1%.

See our latest analysis for POSCO COATED & COLOR STEEL

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating POSCO COATED & COLOR STEEL's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of POSCO COATED & COLOR STEEL's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 9.8% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on POSCO COATED & COLOR STEEL becoming one if things continue as they have.

On a side note, POSCO COATED & COLOR STEEL's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, it's unfortunate that POSCO COATED & COLOR STEEL is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 56% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 4 warning signs with POSCO COATED & COLOR STEEL (at least 1 which can't be ignored) , and understanding them would certainly be useful.

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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