There's Been No Shortage Of Growth Recently For HireRight Holdings' (NYSE:HRT) Returns On Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, we've noticed some promising trends at HireRight Holdings (NYSE:HRT) so let's look a bit deeper.
What Is 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 HireRight Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = US$77m ÷ (US$1.6b - US$147m) (Based on the trailing twelve months to March 2023).
So, HireRight Holdings has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 12%.
Check out our latest analysis for HireRight Holdings
In the above chart we have measured HireRight Holdings' 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 Does the ROCE Trend For HireRight Holdings Tell Us?
HireRight Holdings' ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 57% over the last three years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
What We Can Learn From HireRight Holdings' ROCE
To bring it all together, HireRight Holdings has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 30% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to continue researching HireRight Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.
While HireRight Holdings 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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