Hurco Companies' (NASDAQ:HURC) Returns On Capital Tell Us There Is Reason To Feel Uneasy
When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Hurco Companies (NASDAQ:HURC), we weren't too hopeful.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Hurco Companies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = US$6.2m ÷ (US$291m - US$55m) (Based on the trailing twelve months to October 2023).
So, Hurco Companies has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 12%.
Check out our latest analysis for Hurco Companies
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hurco Companies' ROCE against it's prior returns. If you'd like to look at how Hurco Companies has performed in the past in other metrics, you can view this free graph of Hurco Companies' past earnings, revenue and cash flow.
What Does the ROCE Trend For Hurco Companies Tell Us?
In terms of Hurco Companies' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 15% 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hurco Companies becoming one if things continue as they have.
The Bottom Line On Hurco Companies' ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 35% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a final note, we found 3 warning signs for Hurco Companies (2 are a bit concerning) you should be aware of.
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.
