The Trends At Hwashin Precision Engineering (KOSDAQ:126640) That You Should Know About

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Hwashin Precision Engineering (KOSDAQ:126640), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Hwashin Precision Engineering, this is the formula:

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

0.05 = ₩5.0b ÷ (₩152b - ₩53b) (Based on the trailing twelve months to September 2020).

Thus, Hwashin Precision Engineering has an ROCE of 5.0%. On its own that's a low return, but compared to the average of 4.1% generated by the Auto Components industry, it's much better.

See our latest analysis for Hwashin Precision Engineering

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 want to delve into the historical earnings, revenue and cash flow of Hwashin Precision Engineering, check out these free graphs here.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Hwashin Precision Engineering. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 5.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 35% of total assets, this reported ROCE would probably be less than5.0% because total capital employed would be higher.The 5.0% ROCE could be even lower if current liabilities weren't 35% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Bottom Line On Hwashin Precision Engineering's ROCE

Long story short, while Hwashin Precision Engineering has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 37% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Hwashin Precision Engineering does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Hwashin Precision Engineering isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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