Will Hanon Systems (KRX:018880) Multiply In Value Going Forward?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Hanon Systems (KRX:018880), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Hanon Systems is:

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

0.055 = ₩293b ÷ (₩7.7t - ₩2.4t) (Based on the trailing twelve months to September 2020).

Thus, Hanon Systems has an ROCE of 5.5%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 4.1%.

See our latest analysis for Hanon Systems

Above you can see how the current ROCE for Hanon Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hanon Systems here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Hanon Systems, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 5.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Hanon Systems' ROCE

Bringing it all together, while we're somewhat encouraged by Hanon Systems' reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 93% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 3 warning signs facing Hanon Systems that you might find interesting.

While Hanon Systems 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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