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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Hapag-Lloyd (ETR:HLAG) looks great, so lets see what the trend can tell us.
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. To calculate this metric for Hapag-Lloyd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.47 = €11b ÷ (€29b - €5.8b) (Based on the trailing twelve months to June 2023).
Thus, Hapag-Lloyd has an ROCE of 47%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.
Check out our latest analysis for Hapag-Lloyd
Above you can see how the current ROCE for Hapag-Lloyd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hapag-Lloyd here for free.
What Does the ROCE Trend For Hapag-Lloyd Tell Us?
We like the trends that we're seeing from Hapag-Lloyd. The data shows that returns on capital have increased substantially over the last five years to 47%. Basically the business is earning more per dollar of capital invested and in addition to that, 95% more capital is being employed now too. So we're very much inspired by what we're seeing at Hapag-Lloyd thanks to its ability to profitably reinvest capital.
The Bottom Line
All in all, it's terrific to see that Hapag-Lloyd is reaping the rewards from prior investments and is growing its capital base. And a remarkable 653% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Hapag-Lloyd can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing Hapag-Lloyd we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.