What We Think Of Heerim Architects & Planners Co., Ltd.’s (KOSDAQ:037440) Investment Potential

Today we'll look at Heerim Architects & Planners Co., Ltd. (KOSDAQ:037440) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

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

Or for Heerim Architects & Planners:

0.10 = ₩6.6b ÷ (₩162b - ₩97b) (Based on the trailing twelve months to December 2019.)

So, Heerim Architects & Planners has an ROCE of 10%.

Check out our latest analysis for Heerim Architects & Planners

Is Heerim Architects & Planners's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see Heerim Architects & Planners's ROCE is around the 8.8% average reported by the Professional Services industry. Setting aside the industry comparison for now, Heerim Architects & Planners's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

You can click on the image below to see (in greater detail) how Heerim Architects & Planners's past growth compares to other companies.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Heerim Architects & Planners has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Heerim Architects & Planners's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

Heerim Architects & Planners has current liabilities of ₩97b and total assets of ₩162b. As a result, its current liabilities are equal to approximately 60% of its total assets. Heerim Architects & Planners's current liabilities are fairly high, making its ROCE look better than otherwise.

Our Take On Heerim Architects & Planners's ROCE

Notably, it also has a mediocre ROCE, which to my mind is not an appealing combination. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.