HelloFresh (ETR:HFG) Might Have The Makings Of A Multi-Bagger

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 HelloFresh's (ETR:HFG) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for HelloFresh, this is the formula:

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

0.086 = €148m ÷ (€2.7b - €945m) (Based on the trailing twelve months to September 2023).

So, HelloFresh has an ROCE of 8.6%. In absolute terms, that's a low return but it's around the Consumer Retailing industry average of 11%.

View our latest analysis for HelloFresh

In the above chart we have measured HelloFresh'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 HelloFresh here for free.

The Trend Of ROCE

We're delighted to see that HelloFresh is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 8.6% which is a sight for sore eyes. In addition to that, HelloFresh is employing 594% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From HelloFresh's ROCE

Long story short, we're delighted to see that HelloFresh's reinvestment activities have paid off and the company is now profitable. And a remarkable 143% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

Like most companies, HelloFresh does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.