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Here's What We Make Of H&R Block's (NYSE:HRB) Returns On Capital

Simply Wall St
·3 min read

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, H&R Block (NYSE:HRB) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for H&R Block, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.28 = US$569m ÷ (US$2.6b - US$553m) (Based on the trailing twelve months to October 2020).

Therefore, H&R Block has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 7.4%.

See our latest analysis for H&R Block

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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'd like, you can check out the forecasts from the analysts covering H&R Block here for free.

So How Is H&R Block's ROCE Trending?

In terms of H&R Block's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 42% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on H&R Block becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that H&R Block is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 37% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

H&R Block does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.