Here's What We Make Of Jaeyoung Solutec's (KOSDAQ:049630) Returns On Capital

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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Jaeyoung Solutec (KOSDAQ:049630), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Jaeyoung Solutec:

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

0.017 = ₩1.2b ÷ (₩160b - ₩86b) (Based on the trailing twelve months to September 2020).

Therefore, Jaeyoung Solutec has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.3%.

See our latest analysis for Jaeyoung Solutec

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

What Can We Tell From Jaeyoung Solutec's ROCE Trend?

In terms of Jaeyoung Solutec's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 8.2% five years ago but has since fallen to 1.7%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 30% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 54%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Jaeyoung Solutec's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. It should come as no surprise then that the stock has fallen 68% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching Jaeyoung Solutec, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Jaeyoung Solutec 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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