Is HDC Hyundai Engineering Plastics (KRX:089470) Likely To Turn Things Around?

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at HDC Hyundai Engineering Plastics (KRX:089470), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on HDC Hyundai Engineering Plastics is:

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

0.082 = ₩31b ÷ (₩509b - ₩131b) (Based on the trailing twelve months to September 2020).

Thus, HDC Hyundai Engineering Plastics has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 4.2%.

View our latest analysis for HDC Hyundai Engineering Plastics

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 HDC Hyundai Engineering Plastics, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at HDC Hyundai Engineering Plastics, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 8.2%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, HDC Hyundai Engineering Plastics has done well to pay down its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From HDC Hyundai Engineering Plastics' ROCE

We're a bit apprehensive about HDC Hyundai Engineering Plastics because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 29% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing HDC Hyundai Engineering Plastics, we've discovered 1 warning sign that you should be aware of.

While HDC Hyundai Engineering Plastics 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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