Does Chinyang Holdings' (KRX:100250) Returns On Capital Reflect Well On The Business?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Chinyang Holdings (KRX:100250), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What is it?

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 Chinyang Holdings, this is the formula:

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

0.03 = ₩14b ÷ (₩547b - ₩98b) (Based on the trailing twelve months to September 2020).

Thus, Chinyang Holdings has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.0%.

Check out our latest analysis for Chinyang Holdings

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

So How Is Chinyang Holdings' ROCE Trending?

We are a bit worried about the trend of returns on capital at Chinyang Holdings. Unfortunately the returns on capital have diminished from the 5.0% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Chinyang Holdings becoming one if things continue as they have.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 16% 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.

Chinyang Holdings does have some risks though, and we've spotted 2 warning signs for Chinyang Holdings that you might be interested in.

While Chinyang Holdings 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. 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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