Hanwha Systems (KRX:272210) Has More To Do To Multiply In Value Going Forward

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Hanwha Systems (KRX:272210) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hanwha Systems:

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

0.07 = ₩93b ÷ (₩2.7t - ₩1.4t) (Based on the trailing twelve months to December 2020).

Therefore, Hanwha Systems has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 5.4% generated by the Aerospace & Defense industry, it's much better.

View our latest analysis for Hanwha Systems

Above you can see how the current ROCE for Hanwha Systems 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 Hanwha Systems here for free.

How Are Returns Trending?

Things have been pretty stable at Hanwha Systems, with its capital employed and returns on that capital staying somewhat the same for the last one year. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Hanwha Systems in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. With fewer investment opportunities, it makes sense that Hanwha Systems has been paying out a decent 59% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

On a separate but related note, it's important to know that Hanwha Systems has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. 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.

The Bottom Line

We can conclude that in regards to Hanwha Systems' returns on capital employed and the trends, there isn't much change to report on. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 188% gain to shareholders who have held over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Hanwha Systems does come with some risks, and we've found 2 warning signs that you should be aware of.

While Hanwha Systems 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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