Hwaseung Enterprise (KRX:241590) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at Hwaseung Enterprise (KRX:241590) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Hwaseung Enterprise:

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

0.081 = ₩51b ÷ (₩1.4t - ₩810b) (Based on the trailing twelve months to September 2024).

Thus, Hwaseung Enterprise has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Luxury industry average of 7.2%.

View our latest analysis for Hwaseung Enterprise

In the above chart we have measured Hwaseung Enterprise's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Hwaseung Enterprise .

How Are Returns Trending?

We weren't thrilled with the trend because Hwaseung Enterprise's ROCE has reduced by 45% over the last five years, while the business employed 41% more capital. That being said, Hwaseung Enterprise raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Hwaseung Enterprise probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Another thing to note, Hwaseung Enterprise has a high ratio of current liabilities to total assets of 56%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Hwaseung Enterprise's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Hwaseung Enterprise is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 31% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching Hwaseung Enterprise, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Hwaseung Enterprise may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.