Hansol Chemical (KRX:014680) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Hansol Chemical (KRX:014680) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Hansol Chemical, this is the formula:

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

0.11 = ₩127b ÷ (₩1.5t - ₩258b) (Based on the trailing twelve months to September 2024).

Therefore, Hansol Chemical has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Chemicals industry.

See our latest analysis for Hansol Chemical

In the above chart we have measured Hansol Chemical's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Hansol Chemical .

What Does the ROCE Trend For Hansol Chemical Tell Us?

On the surface, the trend of ROCE at Hansol Chemical doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 11%. However it looks like Hansol Chemical might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Hansol Chemical's ROCE

To conclude, we've found that Hansol Chemical is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 17% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Hansol Chemical has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Hansol Chemical that you might find interesting.

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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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.