Has Hankuk Steel Wire (KOSDAQ:025550) Got What It Takes To Become A Multi-Bagger?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Hankuk Steel Wire (KOSDAQ:025550) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Hankuk Steel Wire:

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

0.038 = ₩5.0b ÷ (₩218b - ₩89b) (Based on the trailing twelve months to September 2020).

Thus, Hankuk Steel Wire has an ROCE of 3.8%. Even though it's in line with the industry average of 4.1%, it's still a low return by itself.

See 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're interested in investigating Hankuk Steel Wire's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Hankuk Steel Wire's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 3.8% for the last five years, and the capital employed within the business has risen 32% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a separate but related note, it's important to know that Hankuk Steel Wire has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Hankuk Steel Wire's ROCE

As we've seen above, Hankuk Steel Wire's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 17% in the last five years. Therefore based on the analysis done in this article, we don't think Hankuk Steel Wire has the makings of a multi-bagger.

One final note, you should learn about the 4 warning signs we've spotted with Hankuk Steel Wire (including 2 which can't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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