Our Take On The Returns On Capital At HWASEUNG IndustriesLtd (KRX:006060)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at HWASEUNG IndustriesLtd (KRX:006060) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for HWASEUNG IndustriesLtd:

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

0.11 = ₩82b ÷ (₩1.4t - ₩713b) (Based on the trailing twelve months to December 2020).

Therefore, HWASEUNG IndustriesLtd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 8.0% it's much better.

See our latest analysis for HWASEUNG IndustriesLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for HWASEUNG IndustriesLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of HWASEUNG IndustriesLtd, check out these free graphs here.

The Trend Of ROCE

In terms of HWASEUNG IndustriesLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 27%, but since then they've fallen to 11%. However it looks like HWASEUNG IndustriesLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, HWASEUNG IndustriesLtd has done well to pay down its current liabilities to 50% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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. Keep in mind 50% is still pretty high, so those risks are still somewhat prevalent.

Our Take On HWASEUNG IndustriesLtd's ROCE

In summary, HWASEUNG IndustriesLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 12% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a separate note, we've found 2 warning signs for HWASEUNG IndustriesLtd you'll probably want to know about.

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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