HD Korea Shipbuilding & Offshore Engineering (KRX:009540) Might Have The Makings Of A Multi-Bagger

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, HD Korea Shipbuilding & Offshore Engineering (KRX:009540) looks quite promising in regards to its trends of return on capital.

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. 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)

0.031 = ₩461b ÷ (₩33t - ₩18t) (Based on the trailing twelve months to March 2024).

Thus, HD Korea Shipbuilding & Offshore Engineering has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.5%.

See our latest analysis for HD Korea Shipbuilding & Offshore Engineering

Above you can see how the current ROCE for HD Korea Shipbuilding & Offshore Engineering 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 HD Korea Shipbuilding & Offshore Engineering .

The Trend Of ROCE

Shareholders will be relieved that HD Korea Shipbuilding & Offshore Engineering has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.1%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 54% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On HD Korea Shipbuilding & Offshore Engineering's ROCE

To bring it all together, HD Korea Shipbuilding & Offshore Engineering has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 14% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for A009540 on our platform that is definitely worth checking out.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.