How Well Is SEOWONINTECH.Co.Ltd (KOSDAQ:093920) Allocating 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. 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, SEOWONINTECH.Co.Ltd (KOSDAQ:093920) we aren't filled with optimism, but let's investigate further.

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

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. The formula for this calculation on SEOWONINTECH.Co.Ltd is:

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

0.076 = ₩13b ÷ (₩217b - ₩47b) (Based on the trailing twelve months to September 2020).

Thus, SEOWONINTECH.Co.Ltd has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 5.6% generated by the Electronic industry, it's much better.

See our latest analysis for SEOWONINTECH.Co.Ltd

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

What Can We Tell From SEOWONINTECH.Co.Ltd's ROCE Trend?

In terms of SEOWONINTECH.Co.Ltd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 14% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 SEOWONINTECH.Co.Ltd to turn into a multi-bagger.

On a related note, SEOWONINTECH.Co.Ltd has decreased its current liabilities to 22% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On SEOWONINTECH.Co.Ltd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

SEOWONINTECH.Co.Ltd does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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