Hana Materials (KOSDAQ:166090) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Hana Materials (KOSDAQ:166090) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Hana Materials:

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

0.077 = ₩41b ÷ (₩673b - ₩136b) (Based on the trailing twelve months to December 2023).

Therefore, Hana Materials has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 5.4% generated by the Semiconductor industry, it's much better.

See our latest analysis for Hana Materials

In the above chart we have measured Hana Materials' 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 Hana Materials for free.

What Can We Tell From Hana Materials' ROCE Trend?

In terms of Hana Materials' historical ROCE movements, the trend isn't fantastic. Over the last one year, returns on capital have decreased to 7.7% from 25% one year ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Hana Materials' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Hana Materials have fallen, meanwhile the business is employing more capital than it was one year ago. Since the stock has skyrocketed 229% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Hana Materials (including 1 which is significant) .

While Hana Materials 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.