Seronics (KOSDAQ:042600) Will Be Hoping To Turn Its Returns On Capital Around

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Seronics (KOSDAQ:042600), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Seronics, this is the formula:

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

0.021 = ₩2.0b ÷ (₩139b - ₩43b) (Based on the trailing twelve months to December 2020).

So, Seronics has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.9%.

See our latest analysis for Seronics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Seronics' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Seronics, check out these free graphs here.

The Trend Of ROCE

There is reason to be cautious about Seronics, given the returns are trending downwards. To be more specific, the ROCE was 11% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Seronics becoming one if things continue as they have.

On a side note, Seronics' current liabilities have increased over the last five years to 31% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.1%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Seronics' ROCE

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. Yet despite these poor fundamentals, the stock has gained a huge 149% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Seronics (of which 2 are concerning!) that you should know about.

While Seronics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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