Hapag-Lloyd (ETR:HLAG) Is Very Good At Capital Allocation

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Hapag-Lloyd (ETR:HLAG) looks great, so lets see what the trend can tell us.

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. Analysts use this formula to calculate it for Hapag-Lloyd:

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

0.49 = €12b ÷ (€31b - €6.1b) (Based on the trailing twelve months to March 2022).

Thus, Hapag-Lloyd has an ROCE of 49%. In absolute terms that's a great return and it's even better than the Shipping industry average of 11%.

See our latest analysis for Hapag-Lloyd

In the above chart we have measured Hapag-Lloyd'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 Hapag-Lloyd here for free.

What Does the ROCE Trend For Hapag-Lloyd Tell Us?

Investors would be pleased with what's happening at Hapag-Lloyd. Over the last five years, returns on capital employed have risen substantially to 49%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 184%. So we're very much inspired by what we're seeing at Hapag-Lloyd thanks to its ability to profitably reinvest capital.

The Key Takeaway

To sum it up, Hapag-Lloyd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 1,103% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Hapag-Lloyd does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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.

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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.