The Returns At Hankook Furniture (KOSDAQ:004590) Provide Us With Signs Of What's To Come

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Hankook Furniture (KOSDAQ:004590), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hankook Furniture:

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

0.069 = ₩8.7b ÷ (₩146b - ₩21b) (Based on the trailing twelve months to June 2020).

Therefore, Hankook Furniture has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.9%.

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're interested in investigating Hankook Furniture's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Hankook Furniture Tell Us?

There are better returns on capital out there than what we're seeing at Hankook Furniture. Over the past five years, ROCE has remained relatively flat at around 6.9% and the business has deployed 56% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Hankook Furniture's ROCE

In conclusion, Hankook Furniture has been investing more capital into the business, but returns on that capital haven't increased. And with the stock having returned a mere 3.9% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know about the risks facing Hankook Furniture, we've discovered 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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