MH EthanolLtd (KRX:023150) Might Be Having Difficulty Using Its Capital Effectively

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at MH EthanolLtd (KRX:023150), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for MH EthanolLtd, this is the formula:

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

0.054 = ₩16b ÷ (₩450b - ₩146b) (Based on the trailing twelve months to December 2020).

Thus, MH EthanolLtd has an ROCE of 5.4%. On its own, that's a low figure but it's around the 6.1% average generated by the Beverage industry.

View our latest analysis for MH EthanolLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for MH EthanolLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of MH EthanolLtd, check out these free graphs here.

So How Is MH EthanolLtd's ROCE Trending?

When we looked at the ROCE trend at MH EthanolLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.4% from 19% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From MH EthanolLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MH EthanolLtd. And the stock has followed suit returning a meaningful 45% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for MH EthanolLtd (of which 2 make us uncomfortable!) that you should know about.

While MH EthanolLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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