If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at HireRight Holdings (NYSE:HRT) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for HireRight Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = US$84m ÷ (US$1.6b - US$152m) (Based on the trailing twelve months to September 2023).
Thus, HireRight Holdings has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 13%.
Check out our latest analysis for HireRight Holdings
Above you can see how the current ROCE for HireRight Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for HireRight Holdings.
What The Trend Of ROCE Can Tell Us
HireRight Holdings is showing promise given that its ROCE is trending up and to the right. The figures show that over the last three years, ROCE has grown 448% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
What We Can Learn From HireRight Holdings' ROCE
To sum it up, HireRight Holdings is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 7.5% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing: We've identified 3 warning signs with HireRight Holdings (at least 1 which is significant) , and understanding these would certainly be useful.
While HireRight Holdings 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.