Today we'll evaluate HeadHunter Group PLC (NASDAQ:HHR) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for HeadHunter Group:
0.34 = RUруб2.6b ÷ (RUруб14b - RUруб6.0b) (Based on the trailing twelve months to June 2019.)
Therefore, HeadHunter Group has an ROCE of 34%.
Does HeadHunter Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, HeadHunter Group's ROCE is meaningfully higher than the 12% average in the Professional Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, HeadHunter Group's ROCE in absolute terms currently looks quite high.
We can see that , HeadHunter Group currently has an ROCE of 34% compared to its ROCE 3 years ago, which was 26%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how HeadHunter Group's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
HeadHunter Group's Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
HeadHunter Group has total assets of RUруб14b and current liabilities of RUруб6.0b. Therefore its current liabilities are equivalent to approximately 44% of its total assets. HeadHunter Group's ROCE is boosted somewhat by its middling amount of current liabilities.
The Bottom Line On HeadHunter Group's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. There might be better investments than HeadHunter Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.