KT (KRX:030200) Is Finding It Tricky To Allocate Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, KT (KRX:030200) we aren't filled with optimism, but let's investigate further.

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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. To calculate this metric for KT, this is the formula:

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

0.029 = ₩809b ÷ (₩42t - ₩14t) (Based on the trailing twelve months to December 2024).

Thus, KT has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Telecom industry average of 10%.

See our latest analysis for KT

Above you can see how the current ROCE for KT compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for KT .

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about KT, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 4.8% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect KT to turn into a multi-bagger.

The Bottom Line On KT's ROCE

In summary, it's unfortunate that KT is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 186%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

KT does have some risks though, and we've spotted 3 warning signs for KT that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.