Stock Analysis

Is Korea District Heating (KRX:071320) Using Capital Effectively?

KOSE:A071320
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If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing 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. In light of that, from a first glance at Korea District Heating (KRX:071320), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Korea District Heating:

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

0.02 = ₩103b ÷ (₩5.9t - ₩762b) (Based on the trailing twelve months to September 2020).

Thus, Korea District Heating has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 4.7%.

See our latest analysis for Korea District Heating

roce
KOSE:A071320 Return on Capital Employed February 15th 2021

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

What Does the ROCE Trend For Korea District Heating Tell Us?

We are a bit worried about the trend of returns on capital at Korea District Heating. Unfortunately the returns on capital have diminished from the 3.4% 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 Korea District Heating to turn into a multi-bagger.

The Bottom Line On Korea District Heating's ROCE

In summary, it's unfortunate that Korea District Heating is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 33% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 2 warning signs for Korea District Heating (1 doesn't sit too well with us) you should be aware of.

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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