Hyundai Mipo Dockyard (KRX:010620) Hasn't Managed To Accelerate Its Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at Hyundai Mipo Dockyard (KRX:010620) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Hyundai Mipo Dockyard:

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

0.015 = ₩37b ÷ (₩3.6t - ₩1.2t) (Based on the trailing twelve months to December 2020).

Therefore, Hyundai Mipo Dockyard has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.4%.

See our latest analysis for Hyundai Mipo Dockyard

Above you can see how the current ROCE for Hyundai Mipo Dockyard compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hyundai Mipo Dockyard here for free.

What The Trend Of ROCE Can Tell Us

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 37% in that same period. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 33% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

Overall, we're not ecstatic to see Hyundai Mipo Dockyard reducing the amount of capital it employs in the business. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 106% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 1 warning sign with Hyundai Mipo Dockyard and understanding it should be part of your investment process.

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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