Be Wary Of Hyosung Advanced Materials (KRX:298050) And Its Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Hyosung Advanced Materials (KRX:298050), so let's see why.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Hyosung Advanced Materials:

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

0.02 = ₩16b ÷ (₩2.4t - ₩1.6t) (Based on the trailing twelve months to September 2020).

Therefore, Hyosung Advanced Materials has an ROCE of 2.0%. 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 Hyosung Advanced Materials

In the above chart we have measured Hyosung Advanced Materials' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hyosung Advanced Materials here for free.

The Trend Of ROCE

The trend of ROCE at Hyosung Advanced Materials is showing some signs of weakness. Unfortunately, returns have declined substantially over the last one year to the 2.0% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 28% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Hyosung Advanced Materials' current liabilities are still rather high at 67% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Hyosung Advanced Materials' ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Since the stock has skyrocketed 255% over the last year, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 1 warning sign for Hyosung Advanced Materials you'll probably want to know about.

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.

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