These Return Metrics Don't Make Mecaro (KOSDAQ:241770) Look Too Strong

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Basically the company is earning less on its investments and it is also reducing its total assets. 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. Analysts use this formula to calculate it for Mecaro:

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

0.0013 = ₩188m ÷ (₩155b - ₩12b) (Based on the trailing twelve months to December 2020).

Thus, Mecaro has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 8.8%.

Check out our latest analysis for Mecaro

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

So How Is Mecaro's ROCE Trending?

In terms of Mecaro's historical ROCE movements, the trend doesn't inspire confidence. About three years ago, returns on capital were 33%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 three years. If these trends continue, we wouldn't expect Mecaro to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Mecaro is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 66% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Mecaro, we've discovered 2 warning signs that you should be aware of.

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.

When trading Mecaro or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.