Is Samyoung Electronics (KRX:005680) Set To Make A Turnaround?

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Samyoung Electronics (KRX:005680), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Samyoung Electronics, this is the formula:

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

0.015 = ₩7.4b ÷ (₩514b - ₩18b) (Based on the trailing twelve months to September 2020).

Thus, Samyoung Electronics has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.6%.

View our latest analysis for Samyoung Electronics

Above you can see how the current ROCE for Samyoung Electronics 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 Samyoung Electronics here for free.

What Can We Tell From Samyoung Electronics' ROCE Trend?

We are a bit worried about the trend of returns on capital at Samyoung Electronics. About five years ago, returns on capital were 1.9%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Samyoung Electronics becoming one if things continue as they have.

Our Take On Samyoung Electronics' 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 five years have experienced a 10% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 1 warning sign with Samyoung Electronics and understanding this should be part of your investment process.

While Samyoung Electronics 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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