How Has KRTnet (KOSDAQ:065530) Allocated Its Capital?

When researching a stock for investment, what can tell us that the company is 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. And from a first read, things don't look too good at KRTnet (KOSDAQ:065530), so let's see why.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for KRTnet:

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

0.04 = ₩3.2b ÷ (₩135b - ₩56b) (Based on the trailing twelve months to September 2020).

Therefore, KRTnet has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Wireless Telecom industry average of 8.4%.

View our latest analysis for KRTnet

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating KRTnet's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is KRTnet's ROCE Trending?

In terms of KRTnet's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 14% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect KRTnet to turn into a multi-bagger.

On a separate but related note, it's important to know that KRTnet has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, it's unfortunate that KRTnet is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 308% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

KRTnet does have some risks though, and we've spotted 1 warning sign for KRTnet that you might be interested in.

While KRTnet isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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