Hojeon (KRX:111110) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Hojeon (KRX:111110) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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 Hojeon, this is the formula:

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

0.0022 = ₩337m ÷ (₩272b - ₩123b) (Based on the trailing twelve months to December 2020).

Therefore, Hojeon has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Luxury industry average of 7.4%.

Check out our latest analysis for Hojeon

In the above chart we have measured Hojeon's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hojeon.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 34% five years ago, while capital employed has grown 102%. That being said, Hojeon raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hojeon's earnings and if they change as a result from the capital raise.

On a related note, Hojeon has decreased its current liabilities to 45% 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. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Hojeon's ROCE

To conclude, we've found that Hojeon is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 23% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Hojeon has the makings of a multi-bagger.

If you'd like to know more about Hojeon, we've spotted 5 warning signs, and 2 of them don't sit too well with us.

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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