Slowing Rates Of Return At Hapag-Lloyd (ETR:HLAG) Leave Little Room For Excitement

What are the early trends we should look for to identify a stock that could 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. In light of that, when we looked at Hapag-Lloyd (ETR:HLAG) and its ROCE trend, we weren't exactly thrilled.

What Is 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. To calculate this metric for Hapag-Lloyd, this is the formula:

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

0.048 = €1.2b ÷ (€30b - €6.1b) (Based on the trailing twelve months to March 2024).

Thus, Hapag-Lloyd has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 16%.

View our latest analysis for Hapag-Lloyd

Above you can see how the current ROCE for Hapag-Lloyd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hapag-Lloyd .

What Can We Tell From Hapag-Lloyd's ROCE Trend?

In terms of Hapag-Lloyd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 4.8% for the last five years, and the capital employed within the business has risen 93% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Hapag-Lloyd's ROCE

In conclusion, Hapag-Lloyd has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 534% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Hapag-Lloyd does have some risks, we noticed 4 warning signs (and 2 which are potentially serious) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com