INNOX Advanced MaterialsLtd (KOSDAQ:272290) Will Be Hoping To Turn Its Returns On Capital Around

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within INNOX Advanced MaterialsLtd (KOSDAQ:272290), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on INNOX Advanced MaterialsLtd is:

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

0.19 = ₩43b ÷ (₩370b - ₩140b) (Based on the trailing twelve months to September 2020).

So, INNOX Advanced MaterialsLtd has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 9.7% it's much better.

See our latest analysis for INNOX Advanced MaterialsLtd

In the above chart we have measured INNOX Advanced MaterialsLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering INNOX Advanced MaterialsLtd here for free.

What Can We Tell From INNOX Advanced MaterialsLtd's ROCE Trend?

There is reason to be cautious about INNOX Advanced MaterialsLtd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 24% that they were earning two 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. If these trends continue, we wouldn't expect INNOX Advanced MaterialsLtd to turn into a multi-bagger.

Our Take On INNOX Advanced MaterialsLtd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 14% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, INNOX Advanced MaterialsLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

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