What Do The Returns On Capital At Namhwa Industrial (KOSDAQ:111710) Tell Us?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Namhwa Industrial (KOSDAQ:111710) 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Namhwa Industrial is:

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

0.044 = ₩6.5b ÷ (₩151b - ₩1.8b) (Based on the trailing twelve months to December 2020).

Therefore, Namhwa Industrial has an ROCE of 4.4%. On its own that's a low return, but compared to the average of 3.3% generated by the Hospitality industry, it's much better.

Check out our latest analysis for Namhwa Industrial

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Namhwa Industrial has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Namhwa Industrial Tell Us?

The returns on capital haven't changed much for Namhwa Industrial in recent years. The company has consistently earned 4.4% for the last five years, and the capital employed within the business has risen 35% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Namhwa Industrial's ROCE

In summary, Namhwa Industrial has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 13% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 1 warning sign facing Namhwa Industrial that you might find interesting.

While Namhwa Industrial isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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