Hwaseung R&A's (KRX:378850) Returns On Capital Are Heading Higher

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Hwaseung R&A (KRX:378850) looks quite promising in regards to its trends of return on capital.

Understanding 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. The formula for this calculation on Hwaseung R&A is:

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

0.18 = ₩32b ÷ (₩445b - ₩272b) (Based on the trailing twelve months to March 2024).

Therefore, Hwaseung R&A has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 8.5% it's much better.

See our latest analysis for Hwaseung R&A

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're interested in investigating Hwaseung R&A's past further, check out this free graph covering Hwaseung R&A's past earnings, revenue and cash flow.

What Can We Tell From Hwaseung R&A's ROCE Trend?

We like the trends that we're seeing from Hwaseung R&A. The numbers show that in the last two years, the returns generated on capital employed have grown considerably to 18%. The amount of capital employed has increased too, by 31%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Hwaseung R&A's current liabilities are still rather high at 61% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

All in all, it's terrific to see that Hwaseung R&A is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 18% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Hwaseung R&A does have some risks, we noticed 6 warning signs (and 2 which shouldn't be ignored) we think you should know about.

While Hwaseung R&A 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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com