What These Trends Mean At KHVATEC (KOSDAQ:060720)

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. So after we looked into KHVATEC (KOSDAQ:060720), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on KHVATEC is:

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

0.038 = ₩8.2b ÷ (₩336b - ₩121b) (Based on the trailing twelve months to September 2020).

So, KHVATEC has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 5.6%.

View our latest analysis for KHVATEC

In the above chart we have measured KHVATEC's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for KHVATEC.

How Are Returns Trending?

We are a bit anxious about the trends of ROCE at KHVATEC. To be more specific, today's ROCE was 13% five years ago but has since fallen to 3.8%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 25% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. 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.

What We Can Learn From KHVATEC's ROCE

In summary, it's unfortunate that KHVATEC is shrinking its capital base and also generating lower returns. In spite of that, the stock has delivered a 12% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

KHVATEC does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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