Here's What's Concerning About HIMSLtd's (KOSDAQ:238490) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. 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 HIMSLtd (KOSDAQ:238490), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on HIMSLtd is:

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

0.027 = ₩2.0b ÷ (₩91b - ₩18b) (Based on the trailing twelve months to September 2024).

Therefore, HIMSLtd has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 6.4%.

View our latest analysis for HIMSLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for HIMSLtd's ROCE against it's prior returns. If you'd like to look at how HIMSLtd has performed in the past in other metrics, you can view this free graph of HIMSLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about HIMSLtd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 32% that they were earning four 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 HIMSLtd 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. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about HIMSLtd, we've spotted 5 warning signs, and 2 of them can't be ignored.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.