Kyungdong City Gas (KRX:267290) Will Be Looking To Turn Around Its Returns

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Kyungdong City Gas (KRX:267290), so let's see why.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Kyungdong City Gas:

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

0.041 = ₩18b ÷ (₩700b - ₩261b) (Based on the trailing twelve months to December 2020).

Therefore, Kyungdong City Gas has an ROCE of 4.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.8%.

See our latest analysis for Kyungdong City Gas

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 Kyungdong City Gas' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Kyungdong City Gas Tell Us?

There is reason to be cautious about Kyungdong City Gas, given the returns are trending downwards. To be more specific, the ROCE was 7.7% three years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Kyungdong City Gas becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Kyungdong City Gas is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 27% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Kyungdong City Gas (including 2 which are potentially serious) .

While Kyungdong City Gas may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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