Capital Allocation Trends At Mercury (KOSDAQ:100590) Aren't Ideal

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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Mercury (KOSDAQ:100590) we aren't filled with optimism, but let's investigate further.

Understanding 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. The formula for this calculation on Mercury is:

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

0.023 = ₩2.5b ÷ (₩143b - ₩34b) (Based on the trailing twelve months to June 2024).

Thus, Mercury has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 3.9%.

View our latest analysis for Mercury

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

How Are Returns Trending?

There is reason to be cautious about Mercury, given the returns are trending downwards. To be more specific, the ROCE was 3.3% one year 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last one year. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Mercury becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Mercury is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 55% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Mercury, we've spotted 4 warning signs, and 1 of them is a bit concerning.

While Mercury 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.