Hankuk Steel Wire (KOSDAQ:025550) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after briefly looking over the numbers, we don't think Hankuk Steel Wire (KOSDAQ:025550) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Hankuk Steel Wire, this is the formula:

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

0.015 = ₩2.6b ÷ (₩259b - ₩79b) (Based on the trailing twelve months to September 2024).

So, Hankuk Steel Wire has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 4.3%.

View our latest analysis for Hankuk Steel Wire

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Hankuk Steel Wire, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.7% over the last five years. However it looks like Hankuk Steel Wire might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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, Hankuk Steel Wire has done well to pay down its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

To conclude, we've found that Hankuk Steel Wire is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 18% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Hankuk Steel Wire (of which 2 are significant!) that you should know about.

While Hankuk Steel Wire 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.