AK Holdings (KRX:006840) Is Looking To Continue Growing Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, AK Holdings (KRX:006840) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for AK Holdings:

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

0.085 = ₩227b ÷ (₩5.3t - ₩2.6t) (Based on the trailing twelve months to September 2024).

Thus, AK Holdings has an ROCE of 8.5%. On its own that's a low return, but compared to the average of 6.2% generated by the Industrials industry, it's much better.

View our latest analysis for AK Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for AK Holdings' ROCE against it's prior returns. If you're interested in investigating AK Holdings' past further, check out this free graph covering AK Holdings' past earnings, revenue and cash flow.

So How Is AK Holdings' ROCE Trending?

AK Holdings has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 41% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 49% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On AK Holdings' ROCE

To bring it all together, AK Holdings has done well to increase the returns it's generating from its capital employed. However the stock is down a substantial 71% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for AK Holdings (of which 1 is a bit concerning!) that you should know about.

While AK Holdings 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.