The Return Trends At HelloFresh (ETR:HFG) Look Promising
There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at HelloFresh (ETR:HFG) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on HelloFresh is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.098 = €152m ÷ (€2.5b - €927m) (Based on the trailing twelve months to March 2023).
So, HelloFresh has an ROCE of 9.8%. In absolute terms, that's a low return but it's around the Consumer Retailing industry average of 11%.
Check out our latest analysis for HelloFresh
Above you can see how the current ROCE for HelloFresh 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 HelloFresh here for free.
What The Trend Of ROCE Can Tell Us
The fact that HelloFresh is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 9.8% which is a sight for sore eyes. Not only that, but the company is utilizing 386% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line On HelloFresh's ROCE
In summary, it's great to see that HelloFresh has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 63% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. 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.
On a final note, we found 3 warning signs for HelloFresh (1 doesn't sit too well with us) you should be aware of.
While HelloFresh 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.
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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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