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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Hercules Site Services (LON:HERC), it didn't seem to tick all of these boxes.
Understanding 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. To calculate this metric for Hercules Site Services, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = UK£2.9m ÷ (UK£40m - UK£20m) (Based on the trailing twelve months to March 2024).
Therefore, Hercules Site Services has an ROCE of 14%. That's a pretty standard return and it's in line with the industry average of 14%.
Check out our latest analysis for Hercules Site Services
In the above chart we have measured Hercules Site Services' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hercules Site Services .
The Trend Of ROCE
When we looked at the ROCE trend at Hercules Site Services, we didn't gain much confidence. Around five years ago the returns on capital were 35%, but since then they've fallen to 14%. 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 side note, Hercules Site Services' current liabilities are still rather high at 50% 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.
What We Can Learn From Hercules Site Services' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Hercules Site Services is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 68% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.