Will HANSHIN Engineering & Construction's (KRX:004960) Growth In ROCE Persist?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at HANSHIN Engineering & Construction (KRX:004960) and its trend of ROCE, we really liked what we saw.

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

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 HANSHIN Engineering & Construction is:

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

0.16 = ₩140b ÷ (₩1.8t - ₩924b) (Based on the trailing twelve months to June 2020).

Therefore, HANSHIN Engineering & Construction has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Construction industry.

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 of past earnings, revenue and cash flow.

How Are Returns Trending?

The trends we've noticed at HANSHIN Engineering & Construction are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 163%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 51%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that HANSHIN Engineering & Construction has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On HANSHIN Engineering & Construction's ROCE

In summary, it's great to see that HANSHIN Engineering & Construction can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 17% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 2 warning signs with HANSHIN Engineering & Construction (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

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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