Will Hansol Logistics' (KRX:009180) Growth In ROCE Persist?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in Hansol Logistics' (KRX:009180) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Hansol Logistics is:

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

0.15 = ₩13b ÷ (₩185b - ₩95b) (Based on the trailing twelve months to September 2020).

Thus, Hansol Logistics has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.0% generated by the Logistics industry.

View our latest analysis for Hansol Logistics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hansol Logistics' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hansol Logistics, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Hansol Logistics has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 15% which is a sight for sore eyes. Not only that, but the company is utilizing 99% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, Hansol Logistics' current liabilities are still rather high at 52% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Overall, Hansol Logistics gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 13% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

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

While Hansol Logistics 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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