Returns On Capital At HB TechnologyLTD (KOSDAQ:078150) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at HB TechnologyLTD (KOSDAQ:078150), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for HB TechnologyLTD, this is the formula:

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

0.022 = ₩5.1b ÷ (₩281b - ₩55b) (Based on the trailing twelve months to December 2020).

So, HB TechnologyLTD has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 8.7%.

Check out our latest analysis for HB TechnologyLTD

In the above chart we have measured HB TechnologyLTD's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering HB TechnologyLTD here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at HB TechnologyLTD doesn't inspire confidence. Over the last three years, returns on capital have decreased to 2.2% from 30% three years ago. However it looks like HB TechnologyLTD 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by HB TechnologyLTD's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 28% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing: We've identified 2 warning signs with HB TechnologyLTD (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

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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