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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 on that note, Heritage-Crystal Clean (NASDAQ:HCCI) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Heritage-Crystal Clean, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$48m ÷ (US$470m - US$78m) (Based on the trailing twelve months to June 2021).
Thus, Heritage-Crystal Clean has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Commercial Services industry.
In the above chart we have measured Heritage-Crystal Clean'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 Heritage-Crystal Clean here for free.
What Does the ROCE Trend For Heritage-Crystal Clean Tell Us?
Investors would be pleased with what's happening at Heritage-Crystal Clean. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 54% more capital is being employed now too. So we're very much inspired by what we're seeing at Heritage-Crystal Clean thanks to its ability to profitably reinvest capital.
The Bottom Line On Heritage-Crystal Clean's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Heritage-Crystal Clean has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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 2 warning signs for Heritage-Crystal Clean (1 shouldn't be ignored) you should be aware of.
While Heritage-Crystal Clean isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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