If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in HIVE Blockchain Technologies' (CVE:HIVE) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for HIVE Blockchain Technologies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.36 = US$86m ÷ (US$247m - US$9.6m) (Based on the trailing twelve months to June 2021).
Thus, HIVE Blockchain Technologies has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Software industry average of 13%.
In the above chart we have measured HIVE Blockchain Technologies' 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 HIVE Blockchain Technologies here for free.
The Trend Of ROCE
The fact that HIVE Blockchain Technologies is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses four years ago, but now it's earning 36% which is a sight for sore eyes. Not only that, but the company is utilizing 42,913% more capital than before, but that's to be expected from a company 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.
On a related note, the company's ratio of current liabilities to total assets has decreased to 3.9%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Key Takeaway
Long story short, we're delighted to see that HIVE Blockchain Technologies' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 5,574% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One final note, you should learn about the 4 warning signs we've spotted with HIVE Blockchain Technologies (including 1 which makes us a bit uncomfortable) .
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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