Heidrick & Struggles International's (NASDAQ:HSII) Returns Have Hit A Wall
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Heidrick & Struggles International's (NASDAQ:HSII) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Heidrick & Struggles International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$100m ÷ (US$891m - US$260m) (Based on the trailing twelve months to March 2023).
Thus, Heidrick & Struggles International has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 12% generated by the Professional Services industry.
See our latest analysis for Heidrick & Struggles International
Above you can see how the current ROCE for Heidrick & Struggles International 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 Heidrick & Struggles International here for free.
How Are Returns Trending?
While the returns on capital are good, they haven't moved much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 84% in that time. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
In Conclusion...
In the end, Heidrick & Struggles International has proven its ability to adequately reinvest capital at good rates of return. Yet over the last five years the stock has declined 31%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
One more thing to note, we've identified 2 warning signs with Heidrick & Struggles International and understanding them should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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