The Returns On Capital At Mecaro (KOSDAQ:241770) Don't Inspire Confidence

What financial metrics can indicate to us that a company is maturing or even 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Mecaro (KOSDAQ:241770), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Mecaro, this is the formula:

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

0.025 = ₩3.6b ÷ (₩157b - ₩12b) (Based on the trailing twelve months to June 2020).

Therefore, Mecaro has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.0%.

Check out our latest analysis for Mecaro

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're interested in investigating Mecaro's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Mecaro's historical ROCE movements, the trend doesn't inspire confidence. About two years ago, returns on capital were 28%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last two years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Mecaro becoming one if things continue as they have.

Our Take On Mecaro's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And, the stock has remained flat over the last year, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Mecaro does have some risks, we noticed 4 warning signs (and 2 which are potentially serious) we think you should know about.

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.

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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.
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