Returns At HD Korea Shipbuilding & Offshore Engineering (KRX:009540) Are On The Way Up

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, HD Korea Shipbuilding & Offshore Engineering (KRX:009540) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on HD Korea Shipbuilding & Offshore Engineering is:

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

0.072 = ₩1.1t ÷ (₩32t - ₩17t) (Based on the trailing twelve months to September 2024).

Thus, HD Korea Shipbuilding & Offshore Engineering has an ROCE of 7.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.6%.

Check out 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 to see what analysts are forecasting going forward, you should check out our free analyst report for HD Korea Shipbuilding & Offshore Engineering .

What Can We Tell From HD Korea Shipbuilding & Offshore Engineering's ROCE Trend?

We're delighted to see that HD Korea Shipbuilding & Offshore Engineering is reaping rewards from its investments and has now 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 7.2%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

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.

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

In summary, we're delighted to see that HD Korea Shipbuilding & Offshore Engineering has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 93% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

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.

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.