Returns On Capital At Senko (KOSDAQ:347000) Paint A Concerning Picture

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Senko (KOSDAQ:347000), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

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 Senko:

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

0.037 = ₩2.1b ÷ (₩66b - ₩10b) (Based on the trailing twelve months to June 2024).

Thus, Senko has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.0%.

Check out our latest analysis for Senko

Historical performance is a great place to start when researching a stock so above you can see the gauge for Senko's ROCE against it's prior returns. If you're interested in investigating Senko's past further, check out this free graph covering Senko's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Senko, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 6.4% that they were earning three years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Senko becoming one if things continue as they have.

What We Can Learn From Senko's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last three years have experienced a 54% 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 want to know some of the risks facing Senko we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

While Senko 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.