Slowing Rates Of Return At Hankook Furniture (KOSDAQ:004590) Leave Little Room For Excitement

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Hankook Furniture (KOSDAQ:004590) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Hankook Furniture, this is the formula:

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

0.077 = ₩10b ÷ (₩156b - ₩20b) (Based on the trailing twelve months to December 2020).

Thus, Hankook Furniture has an ROCE of 7.7%. On its own, that's a low figure but it's around the 8.8% average generated by the Consumer Durables industry.

View our latest analysis for Hankook Furniture

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hankook Furniture's ROCE against it's prior returns. If you'd like to look at how Hankook Furniture has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The returns on capital haven't changed much for Hankook Furniture in recent years. The company has employed 64% more capital in the last five years, and the returns on that capital have remained stable at 7.7%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Hankook Furniture's ROCE

As we've seen above, Hankook Furniture's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 88% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Hankook Furniture, you might be interested to know about the 2 warning signs that our analysis has discovered.

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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