We're Watching These Trends At HDC Hyundai Development (KRX:294870)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at HDC Hyundai Development (KRX:294870), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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 HDC Hyundai Development, this is the formula:

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

0.10 = ₩377b ÷ (₩6.0t - ₩2.2t) (Based on the trailing twelve months to September 2020).

So, HDC Hyundai Development has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 9.5%.

View our latest analysis for HDC Hyundai Development

Above you can see how the current ROCE for HDC Hyundai Development 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 HDC Hyundai Development here for free.

So How Is HDC Hyundai Development's ROCE Trending?

We weren't thrilled with the trend because HDC Hyundai Development's ROCE has reduced by 59% over the last one year, while the business employed 43% more capital. Usually this isn't ideal, but given HDC Hyundai Development conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with HDC Hyundai Development's earnings and if they change as a result from the capital raise.

The Bottom Line On HDC Hyundai Development's ROCE

We're a bit apprehensive about HDC Hyundai Development because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 15% return to shareholders over the last year, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for HDC Hyundai Development (of which 2 are a bit concerning!) that you should know about.

While HDC Hyundai Development 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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