What Do The Returns On Capital At Heng Sheng Holding Group (KOSDAQ:900270) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Heng Sheng Holding Group (KOSDAQ:900270) 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?

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. To calculate this metric for Heng Sheng Holding Group, this is the formula:

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

0.084 = ₩25b ÷ (₩368b - ₩66b) (Based on the trailing twelve months to September 2020).

So, Heng Sheng Holding Group has an ROCE of 8.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.3%.

See our latest analysis for Heng Sheng Holding Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Heng Sheng Holding Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Heng Sheng Holding Group Tell Us?

In terms of Heng Sheng Holding Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 38% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Heng Sheng Holding Group has done well to pay down its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

In summary, we're somewhat concerned by Heng Sheng Holding Group's diminishing returns on increasing amounts of capital. We expect this has contributed to the stock plummeting 71% during the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Heng Sheng Holding Group does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should 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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