How Do Hanil Forging Industrial Co., Ltd.’s (KOSDAQ:024740) Returns On Capital Compare To Peers?

Today we'll look at Hanil Forging Industrial Co., Ltd. (KOSDAQ:024740) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

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

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Hanil Forging Industrial:

0.033 = ₩4.4b ÷ (₩236b - ₩102b) (Based on the trailing twelve months to September 2019.)

So, Hanil Forging Industrial has an ROCE of 3.3%.

See our latest analysis for Hanil Forging Industrial

Is Hanil Forging Industrial's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Hanil Forging Industrial's ROCE appears to be significantly below the 4.6% average in the Auto Components industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Hanil Forging Industrial stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

Hanil Forging Industrial's current ROCE of 3.3% is lower than its ROCE in the past, which was 4.8%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Hanil Forging Industrial's ROCE compares to its industry, and you can click it to see more detail on its past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. If Hanil Forging Industrial is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How Hanil Forging Industrial's Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Hanil Forging Industrial has total liabilities of ₩102b and total assets of ₩236b. As a result, its current liabilities are equal to approximately 43% of its total assets. Hanil Forging Industrial has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.

What We Can Learn From Hanil Forging Industrial's ROCE

There are likely better investments out there. Of course, you might also be able to find a better stock than Hanil Forging Industrial. So you may wish to see this free collection of other companies that have grown earnings strongly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.