Here's What To Make Of Hyosung TNC's (KRX:298020) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Looking at Hyosung TNC (KRX:298020), it does have a high ROCE right now, but lets see how returns are trending.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Hyosung TNC is:

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

0.22 = ₩246b ÷ (₩3.0t - ₩1.9t) (Based on the trailing twelve months to June 2020).

Therefore, Hyosung TNC has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 7.1% earned by companies in a similar industry.

Check out our latest analysis for Hyosung TNC

In the above chart we have measured Hyosung TNC'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 Hyosung TNC.

The Trend Of ROCE

Things have been pretty stable at Hyosung TNC, with its capital employed and returns on that capital staying somewhat the same for the last one year. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward.

On a separate but related note, it's important to know that Hyosung TNC has a current liabilities to total assets ratio of 64%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

Although is allocating it's capital efficiently to generate impressive returns, it isn't compounding its base of capital, which is what we'd see from a multi-bagger. Although the market must be expecting these trends to improve because the stock has gained 24% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One final note, you should learn about the 3 warning signs we've spotted with Hyosung TNC (including 1 which is is significant) .

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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