Will the Promising Trends At Hannong Chemicals (KRX:011500) Continue?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Hannong Chemicals (KRX:011500) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Hannong Chemicals, this is the formula:

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

0.098 = ₩13b ÷ (₩170b - ₩33b) (Based on the trailing twelve months to September 2020).

Thus, Hannong Chemicals has an ROCE of 9.8%. On its own that's a low return, but compared to the average of 8.1% generated by the Chemicals industry, it's much better.

See our latest analysis for Hannong Chemicals

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

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 41%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 19%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Hannong Chemicals' ROCE

All in all, it's terrific to see that Hannong Chemicals is reaping the rewards from prior investments and is growing its capital base. And a remarkable 143% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Hannong Chemicals can keep these trends up, it could have a bright future ahead.

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

While Hannong Chemicals 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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