Returns On Capital Are Showing Encouraging Signs At HD Korea Shipbuilding & Offshore Engineering (KRX:009540)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in HD Korea Shipbuilding & Offshore Engineering's (KRX:009540) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for HD Korea Shipbuilding & Offshore Engineering:

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

0.049 = ₩766b ÷ (₩33t - ₩17t) (Based on the trailing twelve months to June 2024).

Therefore, HD Korea Shipbuilding & Offshore Engineering has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.4%.

See 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 .

So How Is HD Korea Shipbuilding & Offshore Engineering's ROCE Trending?

HD Korea Shipbuilding & Offshore Engineering has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 4.9% on its capital. 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. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

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 53% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

What We Can Learn From HD Korea Shipbuilding & Offshore Engineering's ROCE

As discussed above, HD Korea Shipbuilding & Offshore Engineering appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 48% 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. In light of that, we think it's worth looking further into this stock because if HD Korea Shipbuilding & Offshore Engineering can keep these trends up, it could have a bright future ahead.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for A009540 that compares the share price and estimated value.

While HD Korea Shipbuilding & Offshore Engineering 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.