The Returns At Hyundai Engineering & ConstructionLtd (KRX:000720) Aren't Growing

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Hyundai Engineering & ConstructionLtd (KRX:000720) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Hyundai Engineering & ConstructionLtd is:

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

0.065 = ₩897b ÷ (₩24t - ₩11t) (Based on the trailing twelve months to March 2024).

Therefore, Hyundai Engineering & ConstructionLtd has an ROCE of 6.5%. On its own, that's a low figure but it's around the 6.0% average generated by the Construction industry.

View our latest analysis for Hyundai Engineering & ConstructionLtd

Above you can see how the current ROCE for Hyundai Engineering & ConstructionLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hyundai Engineering & ConstructionLtd .

What Can We Tell From Hyundai Engineering & ConstructionLtd's ROCE Trend?

There hasn't been much to report for Hyundai Engineering & ConstructionLtd's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Hyundai Engineering & ConstructionLtd doesn't end up being a multi-bagger in a few years time.

On a separate but related note, it's important to know that Hyundai Engineering & ConstructionLtd has a current liabilities to total assets ratio of 44%, 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 a nutshell, Hyundai Engineering & ConstructionLtd has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 22% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 2 warning signs with Hyundai Engineering & ConstructionLtd (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

While Hyundai Engineering & ConstructionLtd 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.

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