Some Investors May Be Worried About HANSHIN Engineering & Construction's (KRX:004960) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at HANSHIN Engineering & Construction (KRX:004960) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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. The formula for this calculation on HANSHIN Engineering & Construction is:

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

0.043 = ₩57b ÷ (₩2.4t - ₩1.1t) (Based on the trailing twelve months to June 2025).

Therefore, HANSHIN Engineering & Construction has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.6%.

View our latest analysis for HANSHIN Engineering & Construction

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 HANSHIN Engineering & Construction's past further, check out this free graph covering HANSHIN Engineering & Construction's past earnings, revenue and cash flow.

What Can We Tell From HANSHIN Engineering & Construction's ROCE Trend?

When we looked at the ROCE trend at HANSHIN Engineering & Construction, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 4.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, HANSHIN Engineering & Construction has a high ratio of current liabilities to total assets of 45%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On HANSHIN Engineering & Construction's ROCE

While returns have fallen for HANSHIN Engineering & Construction in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 27% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for HANSHIN Engineering & Construction (of which 2 make us uncomfortable!) that you should know about.

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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.