Stock Analysis

Hyundai Engineering & Construction (KRX:000720) Could Be At Risk Of Shrinking As A Company

KOSE:A000720
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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Hyundai Engineering & Construction (KRX:000720) we aren't filled with optimism, but let's investigate further.

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

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 Hyundai Engineering & Construction, this is the formula:

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

0.048 = ₩555b ÷ (₩18t - ₩6.5t) (Based on the trailing twelve months to December 2020).

Thus, Hyundai Engineering & Construction has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Construction industry average of 8.4%.

Check out our latest analysis for Hyundai Engineering & Construction

roce
KOSE:A000720 Return on Capital Employed April 5th 2021

In the above chart we have measured Hyundai Engineering & Construction's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hyundai Engineering & Construction.

The Trend Of ROCE

There is reason to be cautious about Hyundai Engineering & Construction, given the returns are trending downwards. To be more specific, the ROCE was 9.5% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hyundai Engineering & Construction becoming one if things continue as they have.

What We Can Learn From Hyundai Engineering & Construction's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 21% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know about the risks facing Hyundai Engineering & Construction, we've discovered 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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