Investors Will Want Harmonic's (NASDAQ:HLIT) Growth In ROCE To Persist
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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Harmonic (NASDAQ:HLIT) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
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. To calculate this metric for Harmonic, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$60m ÷ (US$644m - US$204m) (Based on the trailing twelve months to October 2021).
Therefore, Harmonic has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Communications industry.
See our latest analysis for Harmonic
In the above chart we have measured Harmonic's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
Harmonic has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 14% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Harmonic has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
Our Take On Harmonic's ROCE
To sum it up, Harmonic is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 114% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Harmonic does have some risks though, and we've spotted 4 warning signs for Harmonic that you might be interested in.
While Harmonic may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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