In This Article:
When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at HRnetGroup (SGX:CHZ), so let's see why.
We check all companies for important risks. See what we found for HRnetGroup in our free report.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for HRnetGroup, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = S$44m ÷ (S$482m - S$79m) (Based on the trailing twelve months to December 2024).
Therefore, HRnetGroup has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Professional Services industry.
See our latest analysis for HRnetGroup
Above you can see how the current ROCE for HRnetGroup compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for HRnetGroup .
What Can We Tell From HRnetGroup's ROCE Trend?
In terms of HRnetGroup's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 16% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect HRnetGroup to turn into a multi-bagger.
The Key Takeaway
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 77% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.