There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at HRnetGroup (SGX:CHZ), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for HRnetGroup:

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

0.18 = S$73m ÷ (S$530m - S$136m) (Based on the trailing twelve months to December 2021).

Therefore, HRnetGroup has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 0.5% it's much better.

See our latest analysis for HRnetGroup

In the above chart we have measured HRnetGroup'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 HRnetGroup here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at HRnetGroup doesn't inspire confidence. To be more specific, ROCE has fallen from 52% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, HRnetGroup has decreased its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From HRnetGroup's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that HRnetGroup is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 8.3% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about HRnetGroup, we've spotted 2 warning signs, and 1 of them is a bit concerning.

While HRnetGroup 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.