Returns Are Gaining Momentum At Hyrican Informationssysteme (FRA:HYI)

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. 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 Hyrican Informationssysteme's (FRA:HYI) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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

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).

Therefore, Hyrican Informationssysteme has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Tech industry average of 8.7%.

View 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 want to delve into the historical earnings, revenue and cash flow of Hyrican Informationssysteme, check out these free graphs here.

What Does the ROCE Trend For Hyrican Informationssysteme Tell Us?

Hyrican Informationssysteme has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 6.9%, which is always encouraging. 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 this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Hyrican Informationssysteme's ROCE

In summary, we're delighted to see that Hyrican Informationssysteme has been able to increase efficiencies and earn higher rates of return on the same amount of capital. 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. With that in mind, we believe the promising trends warrant this stock for further investigation.

Hyrican Informationssysteme does have some risks though, and we've spotted 2 warning signs 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.

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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