Should We Be Excited About The Trends Of Returns At Hwaseung Enterprise (KRX:241590)?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 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. The formula for this calculation on Hwaseung Enterprise is:

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

0.11 = ₩73b ÷ (₩1.1t - ₩504b) (Based on the trailing twelve months to September 2020).

Therefore, Hwaseung Enterprise has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 7.4% it's much better.

See 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'd like, you can check out the forecasts from the analysts covering Hwaseung Enterprise here for free.

What Does the ROCE Trend For Hwaseung Enterprise Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 19% four years ago, while capital employed has grown 259%. Usually this isn't ideal, but given Hwaseung Enterprise conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hwaseung Enterprise's earnings and if they change as a result from the capital raise. Additionally, we found that Hwaseung Enterprise's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

On a side note, Hwaseung Enterprise has done well to pay down its current liabilities to 44% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 44% is still pretty high, so those risks are still somewhat prevalent.

Our Take 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. In light of this, the stock has only gained 18% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Like most companies, Hwaseung Enterprise does come with some risks, and we've found 1 warning sign that you should be aware of.

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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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