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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Hackett Group (NASDAQ:HCKT) 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. To calculate this metric for Hackett Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$21m ÷ (US$199m - US$46m) (Based on the trailing twelve months to April 2021).
Therefore, Hackett Group has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the IT industry.
In the above chart we have measured Hackett Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hackett Group.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Hackett Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 14% from 23% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line On Hackett Group's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Hackett Group have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 29% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing, we've spotted 3 warning signs facing Hackett Group that you might find interesting.
While Hackett Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. 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.
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