HD Korea Shipbuilding & Offshore Engineering (KRX:009540) Is Looking To Continue Growing Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at HD Korea Shipbuilding & Offshore Engineering (KRX:009540) so let's look a bit deeper.

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

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. To calculate this metric for HD Korea Shipbuilding & Offshore Engineering, this is the formula:

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

0.082 = ₩1.4t ÷ (₩37t - ₩19t) (Based on the trailing twelve months to December 2024).

Therefore, HD Korea Shipbuilding & Offshore Engineering has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 6.2%.

View our latest analysis for HD Korea Shipbuilding & Offshore Engineering

In the above chart we have measured HD Korea Shipbuilding & Offshore Engineering's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering HD Korea Shipbuilding & Offshore Engineering for free.

The Trend Of ROCE

HD Korea Shipbuilding & Offshore Engineering's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 355% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. 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 53% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

To sum it up, HD Korea Shipbuilding & Offshore Engineering is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

While HD Korea Shipbuilding & Offshore Engineering looks impressive, no company is worth an infinite price. The intrinsic value infographic for A009540 helps visualize whether it is currently trading for a fair price.

While HD Korea Shipbuilding & Offshore Engineering isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.