These Return Metrics Don't Make HJ Shipbuilding & Construction (KRX:097230) Look Too Strong

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at HJ Shipbuilding & Construction (KRX:097230), we've spotted some signs that it could be struggling, so let's investigate.

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Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for HJ Shipbuilding & Construction, this is the formula:

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

0.012 = ₩8.0b ÷ (₩2.2t - ₩1.6t) (Based on the trailing twelve months to December 2024).

Therefore, HJ Shipbuilding & Construction has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.3%.

View our latest analysis for HJ Shipbuilding & Construction

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

What Can We Tell From HJ Shipbuilding & Construction's ROCE Trend?

There is reason to be cautious about HJ Shipbuilding & Construction, given the returns are trending downwards. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect HJ Shipbuilding & Construction to turn into a multi-bagger.

On a side note, HJ Shipbuilding & Construction's current liabilities are still rather high at 71% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From HJ Shipbuilding & Construction's ROCE

In summary, it's unfortunate that HJ Shipbuilding & Construction is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 5.0% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 3 warning signs for HJ Shipbuilding & Construction (2 shouldn't be ignored) you should be aware of.

While HJ Shipbuilding & Construction 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.