Should You Be Worried About KEYEAST.Co.Ltd's (KOSDAQ:054780) Returns On Capital?

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within KEYEAST.Co.Ltd (KOSDAQ:054780), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

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 KEYEAST.Co.Ltd:

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

0.035 = ₩1.6b ÷ (₩74b - ₩27b) (Based on the trailing twelve months to September 2020).

Thus, KEYEAST.Co.Ltd has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 8.4%.

See our latest analysis for KEYEAST.Co.Ltd

In the above chart we have measured KEYEAST.Co.Ltd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for KEYEAST.Co.Ltd.

What Can We Tell From KEYEAST.Co.Ltd's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 8.7% five years ago and the business is utilizing 36% less capital, even after their capital raise (conducted prior to the latest reporting period).

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 37%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

To see KEYEAST.Co.Ltd reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors must expect better things on the horizon though because the stock has risen 7.6% 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.

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

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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