Be Wary Of Daemyoung EnergyLtd (KOSDAQ:389260) And Its Returns On Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. So after glancing at the trends within Daemyoung EnergyLtd (KOSDAQ:389260), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Daemyoung EnergyLtd:

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

0.052 = ₩16b ÷ (₩344b - ₩31b) (Based on the trailing twelve months to December 2023).

Therefore, Daemyoung EnergyLtd has an ROCE of 5.2%. On its own, that's a low figure but it's around the 6.5% average generated by the Renewable Energy industry.

View our latest analysis for Daemyoung EnergyLtd

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 Daemyoung EnergyLtd's past further, check out this free graph covering Daemyoung EnergyLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Daemyoung EnergyLtd Tell Us?

There is reason to be cautious about Daemyoung EnergyLtd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 9.3% that they were earning one year ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 one year. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Daemyoung EnergyLtd becoming one if things continue as they have.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last year have experienced a 15% 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.

If you'd like to know more about Daemyoung EnergyLtd, we've spotted 4 warning signs, and 3 of them are concerning.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.