Here's What's Concerning About Chinyang Holdings' (KRX:100250) Returns On Capital

When researching a stock for investment, what can tell us that the company is 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. 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 Holdings (KRX:100250) we aren't filled with optimism, but let's investigate further.

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 Chinyang Holdings is:

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

0.026 = ₩12b ÷ (₩548b - ₩101b) (Based on the trailing twelve months to December 2020).

Therefore, Chinyang Holdings has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.9%.

See 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'd like to look at how Chinyang Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Chinyang Holdings' ROCE Trend?

We are a bit worried about the trend of returns on capital at Chinyang Holdings. Unfortunately the returns on capital have diminished from the 5.2% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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.

What We Can Learn From Chinyang Holdings' ROCE

In summary, it's unfortunate that Chinyang Holdings is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 18% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know about the risks facing Chinyang Holdings, we've discovered 2 warning signs that you should be aware of.

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.

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on 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.