What These Trends Mean At Hyundai Engineering & Construction (KRX:000720)

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Hyundai Engineering & Construction (KRX:000720), we've spotted some signs that it could be struggling, so let's investigate.

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. 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)

0.053 = ₩620b ÷ (₩18t - ₩6.6t) (Based on the trailing twelve months to September 2020).

So, Hyundai Engineering & Construction has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.5%.

View our latest analysis for Hyundai Engineering & Construction

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Hyundai Engineering & Construction Tell Us?

We are a bit worried about the trend of returns on capital at Hyundai Engineering & Construction. About five years ago, returns on capital were 7.1%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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.

The Bottom Line On 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 34% 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 want to continue researching Hyundai Engineering & Construction, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Hyundai Engineering & Construction 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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