What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 Hanssem (KRX:009240) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. The formula for this calculation on Hanssem is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = ₩93b ÷ (₩1.2t - ₩440b) (Based on the trailing twelve months to December 2020).
So, Hanssem has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Consumer Durables industry.
In the above chart we have measured Hanssem's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hanssem here for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Hanssem doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 32% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hanssem. And there could be an opportunity here if other metrics look good too, because the stock has declined 54% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
One more thing, we've spotted 1 warning sign facing Hanssem that you might find interesting.
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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