Will The ROCE Trend At Hanchang Ind.Co.Ltd (KOSDAQ:079170) Continue?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Hanchang Ind.Co.Ltd's (KOSDAQ:079170) returns on capital, so let's have a look.

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 Hanchang Ind.Co.Ltd, this is the formula:

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

0.015 = ₩904m ÷ (₩62b - ₩3.8b) (Based on the trailing twelve months to September 2020).

Therefore, Hanchang Ind.Co.Ltd has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.0%.

View our latest analysis for Hanchang Ind.Co.Ltd

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 want to delve into the historical earnings, revenue and cash flow of Hanchang Ind.Co.Ltd, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 1,418% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

To sum it up, Hanchang Ind.Co.Ltd is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 60% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Hanchang Ind.Co.Ltd, we've discovered 2 warning signs that you should be aware of.

While Hanchang Ind.Co.Ltd 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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