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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 H&R Block (NYSE:HRB) looks great, so lets see what the trend can tell us.
We've discovered 2 warning signs about H&R Block. View them for free.
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. Analysts use this formula to calculate it for H&R Block:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.46 = US$757m ÷ (US$2.7b - US$1.1b) (Based on the trailing twelve months to December 2024).
Thus, H&R Block has an ROCE of 46%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 11%.
See our latest analysis for H&R Block
In the above chart we have measured H&R Block's 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 H&R Block .
What Can We Tell From H&R Block's ROCE Trend?
H&R Block's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 54% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Key Takeaway
To bring it all together, H&R Block has done well to increase the returns it's generating from its capital employed. And a remarkable 328% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you want to know some of the risks facing H&R Block we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.