Returns On Capital At Hanwha Systems (KRX:272210) Have Hit The Brakes

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Hanwha Systems (KRX:272210), it didn't seem to tick all of these boxes.

What Is 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. To calculate this metric for Hanwha Systems, this is the formula:

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

0.047 = ₩120b ÷ (₩4.7t - ₩2.2t) (Based on the trailing twelve months to March 2024).

So, Hanwha Systems has an ROCE of 4.7%. On its own, that's a low figure but it's around the 5.7% average generated by the Aerospace & Defense industry.

Check out 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Hanwha Systems .

What The Trend Of ROCE Can Tell Us

In terms of Hanwha Systems' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.7% for the last five years, and the capital employed within the business has risen 147% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Hanwha Systems' current liabilities are still rather high at 46% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Hanwha Systems' ROCE

As we've seen above, Hanwha Systems' returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 18% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Hanwha Systems does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com