In This Article:
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at Harvey Norman Holdings (ASX:HVN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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 Harvey Norman Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = AU$674m ÷ (AU$7.9b - AU$875m) (Based on the trailing twelve months to December 2023).
Thus, Harvey Norman Holdings has an ROCE of 9.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.6%.
Check out our latest analysis for Harvey Norman Holdings
In the above chart we have measured Harvey Norman 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 analyst report for Harvey Norman Holdings .
What The Trend Of ROCE Can Tell Us
In terms of Harvey Norman Holdings' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 9.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Harvey Norman Holdings' ROCE
In summary, Harvey Norman Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 51% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.