Is ECSTELECOM (KOSDAQ:067010) Shrinking?

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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into ECSTELECOM (KOSDAQ:067010), we weren't too upbeat about how things were going.

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. The formula for this calculation on ECSTELECOM is:

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

0.092 = ₩4.6b ÷ (₩70b - ₩20b) (Based on the trailing twelve months to December 2020).

Thus, ECSTELECOM has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 6.2% generated by the Telecom industry, it's much better.

See our latest analysis for ECSTELECOM

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

What Does the ROCE Trend For ECSTELECOM Tell Us?

We are a bit worried about the trend of returns on capital at ECSTELECOM. To be more specific, the ROCE was 13% five years 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. 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 ECSTELECOM to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 99% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

ECSTELECOM does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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

If you decide to trade ECSTELECOM, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.