KHVATECLtd (KOSDAQ:060720) Is Finding It Tricky To Allocate Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. So after glancing at the trends within KHVATECLtd (KOSDAQ:060720), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for KHVATECLtd, this is the formula:

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

0.016 = ₩3.5b ÷ (₩295b - ₩80b) (Based on the trailing twelve months to December 2020).

So, KHVATECLtd has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Electronic industry average of 5.9%.

View our latest analysis for KHVATECLtd

Above you can see how the current ROCE for KHVATECLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering KHVATECLtd here for free.

What Can We Tell From KHVATECLtd's ROCE Trend?

The trend of returns that KHVATECLtd is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 1.6% we see today. On top of that, the business is utilizing 25% less capital within its operations. 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.

Our Take On KHVATECLtd's ROCE

In summary, it's unfortunate that KHVATECLtd is shrinking its capital base and also generating lower returns. Despite the concerning underlying trends, the stock has actually gained 14% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you're still interested in KHVATECLtd it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While KHVATECLtd 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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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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