How Well Is Hankook Shell OilLtd (KRX:002960) Allocating Its Capital?

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Hankook Shell OilLtd (KRX:002960) we aren't filled with optimism, but let's investigate further.

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

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. The formula for this calculation on Hankook Shell OilLtd is:

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

0.30 = ₩30b ÷ (₩136b - ₩37b) (Based on the trailing twelve months to September 2020).

Thus, Hankook Shell OilLtd has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 5.5%.

See our latest analysis for Hankook Shell OilLtd

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 Hankook Shell OilLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Hankook Shell OilLtd's ROCE Trending?

In terms of Hankook Shell OilLtd's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 43% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Hankook Shell OilLtd to turn into a multi-bagger.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 31% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

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

Hankook Shell OilLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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