How Well Is NPD (KOSDAQ:198080) Allocating Its Capital?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into NPD (KOSDAQ:198080), the trends above didn't look too great.

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. Analysts use this formula to calculate it for NPD:

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

0.075 = ₩8.3b ÷ (₩176b - ₩65b) (Based on the trailing twelve months to December 2020).

Thus, NPD has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 5.2% generated by the Electronic industry, it's much better.

View our latest analysis for NPD

Above you can see how the current ROCE for NPD compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of NPD's historical ROCE movements, the trend doesn't inspire confidence. About one year ago, returns on capital were 28%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on NPD becoming one if things continue as they have.

Our Take On NPD's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 4.9% return to shareholders who held over the last year. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

NPD does have some risks, we noticed 4 warning signs (and 2 which are significant) 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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