Hankook Steel's (KRX:025890) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Hankook Steel (KRX:025890) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hankook Steel, this is the formula:

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

0.064 = ₩2.2b ÷ (₩44b - ₩9.9b) (Based on the trailing twelve months to March 2024).

So, Hankook Steel has an ROCE of 6.4%. Even though it's in line with the industry average of 6.3%, it's still a low return by itself.

Check out our latest analysis for Hankook Steel

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hankook Steel's ROCE against it's prior returns. If you're interested in investigating Hankook Steel's past further, check out this free graph covering Hankook Steel's past earnings, revenue and cash flow.

What Does the ROCE Trend For Hankook Steel Tell Us?

Like most people, we're pleased that Hankook Steel is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 6.4% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 32%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Bottom Line

In the end, Hankook Steel has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has only returned 22% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to continue researching Hankook Steel, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Hankook Steel 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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com