Returns On Capital - An Important Metric For Hanil Feed (KOSDAQ:005860)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Hanil Feed (KOSDAQ:005860) so let's look a bit deeper.

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 Hanil Feed is:

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

0.027 = ₩1.8b ÷ (₩163b - ₩96b) (Based on the trailing twelve months to September 2020).

So, Hanil Feed has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Food industry average of 7.1%.

View our latest analysis for Hanil Feed

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

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Hanil Feed has broken into profitability. The company now earns 2.7% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

On a separate but related note, it's important to know that Hanil Feed has a current liabilities to total assets ratio of 59%, 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.

The Bottom Line On Hanil Feed's ROCE

In summary, we're delighted to see that Hanil Feed has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Hanil Feed, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Hanil Feed 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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