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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Hertz Global Holdings' (NASDAQ:HTZ) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Hertz Global Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = US$1.2b ÷ (US$26b - US$2.3b) (Based on the trailing twelve months to September 2023).
Therefore, Hertz Global Holdings has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Transportation industry average of 9.1%.
View our latest analysis for Hertz Global Holdings
Above you can see how the current ROCE for Hertz Global Holdings 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 report on analyst forecasts for the company.
What Does the ROCE Trend For Hertz Global Holdings Tell Us?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 5.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 22%. So we're very much inspired by what we're seeing at Hertz Global Holdings thanks to its ability to profitably reinvest capital.
The Bottom Line On Hertz Global Holdings' ROCE
In summary, it's great to see that Hertz Global Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 53% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.