HD Hyundai Heavy IndustriesLtd (KRX:329180) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, HD Hyundai Heavy IndustriesLtd (KRX:329180) looks quite promising in regards to its trends of return on capital.

We've discovered 1 warning sign about HD Hyundai Heavy IndustriesLtd. View them for free.

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. The formula for this calculation on HD Hyundai Heavy IndustriesLtd is:

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

0.092 = ₩698b ÷ (₩19t - ₩12t) (Based on the trailing twelve months to December 2024).

So, HD Hyundai Heavy IndustriesLtd has an ROCE of 9.2%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 6.3%.

See our latest analysis for HD Hyundai Heavy IndustriesLtd

In the above chart we have measured HD Hyundai Heavy IndustriesLtd's 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 HD Hyundai Heavy IndustriesLtd .

What Can We Tell From HD Hyundai Heavy IndustriesLtd's ROCE Trend?

HD Hyundai Heavy IndustriesLtd's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 2,603% over the last four years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 61% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From HD Hyundai Heavy IndustriesLtd's ROCE

As discussed above, HD Hyundai Heavy IndustriesLtd appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, HD Hyundai Heavy IndustriesLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While HD Hyundai Heavy IndustriesLtd 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.