Investors Could Be Concerned With Harvey Norman Holdings' (ASX:HVN) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Harvey Norman Holdings (ASX:HVN), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

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 Harvey Norman Holdings is:

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

0.10 = AU$723m ÷ (AU$8.4b - AU$1.4b) (Based on the trailing twelve months to June 2025).

Thus, Harvey Norman Holdings has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Multiline Retail industry average of 7.8% it's much better.

Check out our latest analysis for Harvey Norman Holdings

In the above chart we have measured Harvey Norman Holdings' 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 Harvey Norman Holdings for free.

What Can We Tell From Harvey Norman Holdings' ROCE Trend?

On the surface, the trend of ROCE at Harvey Norman Holdings doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 10%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Harvey Norman Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Harvey Norman Holdings' reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 114% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 2 warning signs for Harvey Norman Holdings you'll probably want to know about.

While Harvey Norman Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.