Will the Promising Trends At Soosan Heavy Industries (KRX:017550) Continue?

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Soosan Heavy Industries (KRX:017550) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Soosan Heavy Industries, this is the formula:

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

0.058 = ₩6.5b ÷ (₩189b - ₩77b) (Based on the trailing twelve months to September 2020).

So, Soosan Heavy Industries has an ROCE of 5.8%. On its own, that's a low figure but it's around the 5.4% average generated by the Machinery industry.

See our latest analysis for Soosan Heavy Industries

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

What Does the ROCE Trend For Soosan Heavy Industries Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 5.8%. The amount of capital employed has increased too, by 20%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

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. Essentially the business now has suppliers or short-term creditors funding about 41% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line

All in all, it's terrific to see that Soosan Heavy Industries is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 47% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 3 warning signs facing Soosan Heavy Industries that you might find interesting.

While Soosan Heavy Industries 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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