Stock Analysis

Be Wary Of TelcowareLtd (KRX:078000) And Its Returns On Capital

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If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining 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 TelcowareLtd (KRX:078000), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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. To calculate this metric for TelcowareLtd, this is the formula:

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

0.016 = ₩1.7b ÷ (₩116b - ₩6.2b) (Based on the trailing twelve months to September 2020).

So, TelcowareLtd has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Software industry average of 8.4%.

Check out our latest analysis for TelcowareLtd

KOSE:A078000 Return on Capital Employed December 31st 2020

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 TelcowareLtd, check out these free graphs here.

So How Is TelcowareLtd's ROCE Trending?

In terms of TelcowareLtd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.7% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 TelcowareLtd to turn into a multi-bagger.

The Bottom Line On TelcowareLtd's ROCE

In summary, it's unfortunate that TelcowareLtd is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 10% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 5 warning signs for TelcowareLtd (1 is a bit concerning) you should be aware of.

While TelcowareLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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