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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Hunting’s (LON:HTG) returns on capital, so let’s have a look.
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. The formula for this calculation on Hunting is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.08 = US$81m ÷ (US$1.3b – US$248m) (Based on the trailing twelve months to June 2024).
Therefore, Hunting has an ROCE of 8.0%. Ultimately, that’s a low return and it under-performs the Energy Services industry average of 11%.
See our latest analysis for Hunting
In the above chart we have measured Hunting’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 Hunting for free.
You’d find it hard not to be impressed with the ROCE trend at Hunting. The data shows that returns on capital have increased by 43% over the trailing five years. That’s a very favorable trend because this means that the company is earning more per dollar of capital that’s being employed. In regards to capital employed, Hunting appears to been achieving more with less, since the business is using 20% less capital to run its operation. If this trend continues, the business might be getting more efficient but it’s shrinking in terms of total assets.
From what we’ve seen above, Hunting has managed to increase it’s returns on capital all the while reducing it’s capital base. And since the stock has fallen 20% over the last five years, there might be an opportunity here. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
If you’d like to know more about Hunting, we’ve spotted 2 warning signs, and 1 of them doesn’t sit too well with us.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
