We like these underlying return on capital trends for Hyundai Rotem (KRX:064350)

What early trends should we look for to identify a stock that could multiply in value over the long term? Typically we want to notice a growth trend return on capital employed (ROCE) and, as a result, a growing one base of the capital employed. Essentially, this means that a company has profitable initiatives that it can continue to reinvest in, which is a characteristic of a compounding machine. So when we looked at that Hyundai Rotem (KRX:064350) and its ROCE trend, we really liked what we saw.

What is Return on Capital Employed (ROCE)?

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return) in relation to the capital employed in the company. Analysts use this formula to calculate it for Hyundai Rotem:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.14 = ₩268b ÷ (₩5.0t – ₩3.0t) (Based on the last twelve months ended June 2024).

Therefore, Hyundai Rotem has a ROCE of 14%. On its own, that’s a standard return, but it’s much better than the 6.4% generated by the machinery industry.

Check out our latest analysis for Hyundai Rotem

Above you can see how the current ROCE for Hyundai Rotem compares to its past returns on capital, but there’s only so much you can tell from past history. If you are interested, you can see the analyst forecasts in our free Analyst report for Hyundai Rotem.

How is Hyundai Rotem’s ROCE developing?

Shareholders will be relieved that Hyundai Rotem has returned to profitability. While the company was unprofitable in the past, it has now turned around and is earning 14% of its capital. Interestingly, the company’s capital deployment has remained relatively unchanged, so these higher returns are due to either the payback of previous investments or greater efficiency. While we’re glad the company is more efficient, keep in mind that this could mean the company lacks areas to invest in internally for growth in the future. Only if a company reinvests in itself continuously and with high returns can it develop into a multi-bagger in the long term.

It should also be noted that Hyundai Rotem has a high share of current liabilities in total assets at 60%. This can entail certain risks, as the company is fundamentally dependent to a relatively large extent on its suppliers or other short-term creditors. While it’s not necessarily a bad thing, having this ratio lower can be beneficial.

Our opinion on Hyundai Rotem’s ROCE

In summary, Hyundai Rotem is generating higher returns with the same amount of capital, and that’s impressive. And because the stock has performed exceptionally well over the past five years, investors are taking these patterns into account. With that in mind, we think it’s worth taking a closer look at this stock because if Hyundai Rotem can maintain these trends, the company could have a bright future ahead.

On the other side of ROCE, we need to consider valuation. That’s why we have one FREE intrinsic value estimate for A064350 on our platform this is definitely worth a look.

If you want to look for solid companies with great earnings, check this out free List of companies with good balance sheets and impressive returns on equity.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.