Harbor Custom Development (NASDAQ:HCDI) Shareholders Will Want The ROCE Trajectory To Continue
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Harbor Custom Development (NASDAQ:HCDI) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Harbor Custom Development is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.004 = US$386k ÷ (US$227m - US$131m) (Based on the trailing twelve months to September 2022).
Thus, Harbor Custom Development has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 17%.
View our latest analysis for Harbor Custom Development
In the above chart we have measured Harbor Custom Development's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Harbor Custom Development.
The Trend Of ROCE
Harbor Custom Development has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 0.4% on its capital. In addition to that, Harbor Custom Development is employing 5,316% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
One more thing to note, Harbor Custom Development has decreased current liabilities to 58% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
Overall, Harbor Custom Development gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Although the company may be facing some issues elsewhere since the stock has plunged 79% in the last year. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
Harbor Custom Development does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those shouldn't be ignored...
While Harbor Custom Development isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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