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There Are Reasons To Feel Uneasy About Hallenstein Glasson Holdings' (NZSE:HLG) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So while Hallenstein Glasson Holdings (NZSE:HLG) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Hallenstein Glasson Holdings:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.31 = NZ$48m ÷ (NZ$209m - NZ$55m) (Based on the trailing twelve months to February 2024).

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So, Hallenstein Glasson Holdings has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 13%.

See our latest analysis for Hallenstein Glasson Holdings

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Above you can see how the current ROCE for Hallenstein Glasson Holdings 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 Hallenstein Glasson Holdings for free.

The Trend Of ROCE

When we looked at the ROCE trend at Hallenstein Glasson Holdings, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 58%. However it looks like Hallenstein Glasson Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that Hallenstein Glasson Holdings is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 82% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for Hallenstein Glasson Holdings that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.