The Return Trends At Hyosung Heavy Industries (KRX:298040) Look Promising

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Hyosung Heavy Industries (KRX:298040) and its trend of ROCE, we really liked what we saw.

Understanding 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. The formula for this calculation on Hyosung Heavy Industries is:

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

0.17 = ₩299b ÷ (₩4.9t - ₩3.2t) (Based on the trailing twelve months to March 2024).

Therefore, Hyosung Heavy Industries has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.1% generated by the Electrical industry.

View our latest analysis for Hyosung Heavy Industries

In the above chart we have measured Hyosung Heavy Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hyosung Heavy Industries .

What Can We Tell From Hyosung Heavy Industries' ROCE Trend?

Hyosung Heavy Industries is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 182% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a separate but related note, it's important to know that Hyosung Heavy Industries has a current liabilities to total assets ratio of 65%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To bring it all together, Hyosung Heavy Industries has done well to increase the returns it's generating from its capital employed. And a remarkable 849% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Hyosung Heavy Industries does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Hyosung Heavy Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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