HCT (KOSDAQ:072990) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at HCT (KOSDAQ:072990) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 HCT, this is the formula:

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

0.17 = ₩10b ÷ (₩85b - ₩23b) (Based on the trailing twelve months to December 2020).

Thus, HCT has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Professional Services industry.

View our latest analysis for HCT

Historical performance is a great place to start when researching a stock so above you can see the gauge for HCT's ROCE against it's prior returns. If you're interested in investigating HCT's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is HCT's ROCE Trending?

In terms of HCT's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 23%, but since then they've fallen to 17%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On HCT's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that HCT is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 136% to shareholders in the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 1 warning sign for HCT you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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. 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.
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