Be Wary Of POSCO Holdings (KRX:005490) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think POSCO Holdings (KRX:005490) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for POSCO Holdings, this is the formula:

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

0.039 = ₩3.1t ÷ (₩103t - ₩23t) (Based on the trailing twelve months to March 2024).

So, POSCO Holdings has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.1%.

Check out our latest analysis for POSCO Holdings

Above you can see how the current ROCE for POSCO Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering POSCO Holdings for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at POSCO Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.9% from 8.5% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

In Conclusion...

To conclude, we've found that POSCO Holdings is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 96% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching POSCO Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.

While POSCO Holdings 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. 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.