To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. With that in mind, we've noticed some promising trends at Herc Holdings (NYSE:HRI) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Herc Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$628m ÷ (US$6.7b - US$655m) (Based on the trailing twelve months to June 2023).
Thus, Herc Holdings has an ROCE of 10%. In isolation, that's a pretty standard return but against the Trade Distributors industry average of 13%, it's not as good.
View our latest analysis for Herc Holdings
In the above chart we have measured Herc Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
Herc Holdings is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 10%. The amount of capital employed has increased too, by 88%. So we're very much inspired by what we're seeing at Herc Holdings thanks to its ability to profitably reinvest capital.
The Bottom Line On Herc Holdings' ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Herc Holdings has. And a remarkable 240% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
Herc Holdings does have some risks though, and we've spotted 3 warning signs for Herc Holdings that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.