Hyundai Engineering & ConstructionLtd (KRX:000720) Could Be Struggling To Allocate Capital

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Hyundai Engineering & ConstructionLtd (KRX:000720), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Hyundai Engineering & ConstructionLtd:

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

0.05 = ₩670b ÷ (₩25t - ₩12t) (Based on the trailing twelve months to September 2024).

So, Hyundai Engineering & ConstructionLtd has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.6%.

Check out our latest analysis for Hyundai Engineering & ConstructionLtd

In the above chart we have measured Hyundai Engineering & ConstructionLtd'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 analyst report for Hyundai Engineering & ConstructionLtd .

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Hyundai Engineering & ConstructionLtd, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 7.4% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hyundai Engineering & ConstructionLtd becoming one if things continue as they have.

On a separate but related note, it's important to know that Hyundai Engineering & ConstructionLtd has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's unfortunate that Hyundai Engineering & ConstructionLtd is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 23% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with Hyundai Engineering & ConstructionLtd and understanding this should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.