HeiQ (LON:HEIQ) Will Be Hoping To Turn Its Returns On Capital Around
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at HeiQ (LON:HEIQ), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on HeiQ is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0068 = US$566k ÷ (US$103m - US$19m) (Based on the trailing twelve months to June 2022).
Therefore, HeiQ has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 10%.
See our latest analysis for HeiQ
Above you can see how the current ROCE for HeiQ compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for HeiQ.
How Are Returns Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 3.1% four years ago, while the business's capital employed increased by 324%. Usually this isn't ideal, but given HeiQ conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence HeiQ might not have received a full period of earnings contribution from it.
The Bottom Line On HeiQ's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that HeiQ is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 34% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you'd like to know about the risks facing HeiQ, we've discovered 3 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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