Hyrican Informationssysteme (FRA:HYI) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Hyrican Informationssysteme (FRA:HYI) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hyrican Informationssysteme:

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

0.069 = €1.8m ÷ (€30m - €3.6m) (Based on the trailing twelve months to December 2020).

So, Hyrican Informationssysteme has an ROCE of 6.9%. On its own, that's a low figure but it's around the 8.2% average generated by the Tech industry.

See our latest analysis for Hyrican Informationssysteme

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hyrican Informationssysteme's ROCE against it's prior returns. If you're interested in investigating Hyrican Informationssysteme's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Hyrican Informationssysteme has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 6.9% on its capital. While returns have increased, the amount of capital employed by Hyrican Informationssysteme has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 12%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

As discussed above, Hyrican Informationssysteme appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

Hyrican Informationssysteme does have some risks though, and we've spotted 1 warning sign for Hyrican Informationssysteme that you might be interested in.

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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