Our Take On The Returns On Capital At Héroux-Devtek (TSE:HRX)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Héroux-Devtek (TSE:HRX), it didn't seem to tick all of these boxes.

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. To calculate this metric for Héroux-Devtek, this is the formula:

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

0.071 = CA$49m ÷ (CA$878m - CA$193m) (Based on the trailing twelve months to December 2020).

So, Héroux-Devtek has an ROCE of 7.1%. On its own, that's a low figure but it's around the 8.5% average generated by the Aerospace & Defense industry.

See our latest analysis for Héroux-Devtek

In the above chart we have measured Héroux-Devtek'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 Héroux-Devtek here for free.

So How Is Héroux-Devtek's ROCE Trending?

The returns on capital haven't changed much for Héroux-Devtek in recent years. The company has consistently earned 7.1% for the last five years, and the capital employed within the business has risen 38% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Héroux-Devtek's ROCE

As we've seen above, Héroux-Devtek's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 19% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know more about Héroux-Devtek, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

While Héroux-Devtek 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. 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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