eSang NetworksLtd (KOSDAQ:080010) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at eSang NetworksLtd (KOSDAQ:080010) and its ROCE trend, we weren't exactly thrilled.

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 eSang NetworksLtd:

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

0.024 = ₩3.1b ÷ (₩154b - ₩28b) (Based on the trailing twelve months to December 2020).

Therefore, eSang NetworksLtd has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Online Retail industry average of 5.9%.

Check out our latest analysis for eSang NetworksLtd

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 want to delve into the historical earnings, revenue and cash flow of eSang NetworksLtd, check out these free graphs here.

How Are Returns Trending?

In terms of eSang NetworksLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.4% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On eSang NetworksLtd's ROCE

We're a bit apprehensive about eSang NetworksLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 20% in 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.

eSang NetworksLtd does have some risks though, and we've spotted 3 warning signs for eSang NetworksLtd 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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