Hanshin Machinery (KRX:011700) Has Some Difficulty Using Its Capital Effectively

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Hanshin Machinery (KRX:011700) we aren't filled with optimism, but let's investigate further.

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Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Hanshin Machinery:

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

0.0028 = ₩281m ÷ (₩116b - ₩16b) (Based on the trailing twelve months to June 2025).

Therefore, Hanshin Machinery has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.5%.

View our latest analysis for Hanshin Machinery

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hanshin Machinery's ROCE against it's prior returns. If you're interested in investigating Hanshin Machinery's past further, check out this free graph covering Hanshin Machinery's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Hanshin Machinery's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 3.6% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hanshin Machinery becoming one if things continue as they have.

What We Can Learn From Hanshin Machinery's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 110%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 2 warning signs for Hanshin Machinery (1 is potentially serious) you should be aware of.

While Hanshin Machinery 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.