We Like These Underlying Return On Capital Trends At Husteel (KRX:005010)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Husteel's (KRX:005010) 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. Analysts use this formula to calculate it for Husteel:

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

0.037 = ₩18b ÷ (₩604b - ₩125b) (Based on the trailing twelve months to December 2020).

So, Husteel has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 4.8%.

Check out our latest analysis for Husteel

Historical performance is a great place to start when researching a stock so above you can see the gauge for Husteel's ROCE against it's prior returns. If you'd like to look at how Husteel has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. The figures show that over the last five years, ROCE has grown 94% whilst employing roughly the same amount of capital. 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.

The Bottom Line On Husteel's ROCE

In summary, we're delighted to see that Husteel has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 16% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Husteel we've found 4 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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