HL Mando's (KRX:204320) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So on that note, HL Mando (KRX:204320) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for HL Mando:

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

0.07 = ₩297b ÷ (₩6.8t - ₩2.6t) (Based on the trailing twelve months to June 2024).

Therefore, HL Mando has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 9.1%.

See our latest analysis for HL Mando

In the above chart we have measured HL Mando's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering HL Mando for free.

What Can We Tell From HL Mando's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.0%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 45%. So we're very much inspired by what we're seeing at HL Mando thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, HL Mando has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 18% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One final note, you should learn about the 2 warning signs we've spotted with HL Mando (including 1 which makes us a bit uncomfortable) .

While HL Mando 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.