Hotcopper Holdings Limited (ASX:HOT)’s Return on Capital

I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Hotcopper Holdings Limited (ASX:HOT).

Purchasing Hotcopper Holdings gives you an ownership stake in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to HOT’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Hotcopper Holdings is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

Check out our latest analysis for Hotcopper Holdings

Calculating Return On Capital Employed for HOT

You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. To determine Hotcopper Holdings’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). HOT’s ROCE is calculated below:

ROCE Calculation for HOT

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = AU$2m ÷ (AU$6m – AU$2m) = 41%

As you can see, HOT earned A$41.1 from every A$100 you invested over the previous twelve months. This shows Hotcopper Holdings provides a great return on capital employed that is well above the 15% ROCE that is typically considered to be a strong benchmark. As a result, if HOT is clever with their reinvestments or dividend payments, investors can grow their capital at an enviable rate over time.

ASX:HOT Last Perf October 16th 18
ASX:HOT Last Perf October 16th 18

A deeper look

Hotcopper Holdings’s relatively strong ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Hotcopper Holdings is in a favourable position, but this can change if these factors underperform. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that Hotcopper Holdings will continue the solid returns. If you go back three years, you’ll find that HOT’s ROCE has decreased from 64%. Over the same period, EBT went from AU$815k to AU$2m but capital employed has grown by a proportionally greater amount in response to a rise in total assets , indicating that the previous growth in earnings has not been able to improve ROCE because the company now needs to employ more capital to operate the business.

Next Steps

Despite HOT’s downward trend in ROCE in the recent past, the company still remains an attractive candidate that is capable of producing solid capital returns and a potentially strong return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. If you don’t pay attention to these factors you cannot be sure if the downward path is a signal to run, or just a blip in an otherwise solid return profile. Hotcopper Holdings’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

  1. Future Outlook: What are well-informed industry analysts predicting for HOT’s future growth? Take a look at our free research report of analyst consensus for HOT’s outlook.
  2. Valuation: What is HOT worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HOT is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.