Samsung Heavy Industries' (KRX:010140) Returns On Capital Are Heading Higher

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in Samsung Heavy Industries' (KRX:010140) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Samsung Heavy Industries:

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

0.096 = ₩407b ÷ (₩15t - ₩11t) (Based on the trailing twelve months to September 2024).

So, Samsung Heavy Industries has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 6.7% generated by the Machinery industry, it's much better.

Check out our latest analysis for Samsung Heavy Industries

In the above chart we have measured Samsung Heavy Industries' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Samsung Heavy Industries .

What The Trend Of ROCE Can Tell Us

We're delighted to see that Samsung Heavy Industries is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 9.6% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 45%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 72% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Samsung Heavy Industries' ROCE

From what we've seen above, Samsung Heavy Industries has managed to increase it's returns on capital all the while reducing it's capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Samsung Heavy Industries 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 A010140 that compares the share price and estimated value.

While Samsung Heavy Industries 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.