Returns On Capital Signal Tricky Times Ahead For Hanil Feed (KOSDAQ:005860)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Hanil Feed (KOSDAQ:005860), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Hanil Feed:

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

0.0088 = ₩1.5b ÷ (₩198b - ₩31b) (Based on the trailing twelve months to September 2024).

So, Hanil Feed has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.6%.

See our latest analysis for Hanil Feed

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hanil Feed's ROCE against it's prior returns. 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 Hanil Feed's past earnings, revenue and cash flow.

What Can We Tell From Hanil Feed's ROCE Trend?

On the surface, the trend of ROCE at Hanil Feed doesn't inspire confidence. To be more specific, ROCE has fallen from 5.7% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Hanil Feed has done well to pay down its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Hanil Feed's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 117% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about Hanil Feed, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.