Here's What To Make Of HSS Hire Group's (LON:HSS) Decelerating Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at HSS Hire Group (LON:HSS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Understanding 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 HSS Hire Group, this is the formula:

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

0.063 = UK£19m ÷ (UK£402m - UK£106m) (Based on the trailing twelve months to June 2024).

So, HSS Hire Group has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 13%.

See our latest analysis for HSS Hire Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for HSS Hire Group's ROCE against it's prior returns. If you'd like to look at how HSS Hire Group has performed in the past in other metrics, you can view this free graph of HSS Hire Group's past earnings, revenue and cash flow.

The Trend Of ROCE

Over the past five years, HSS Hire Group's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if HSS Hire Group doesn't end up being a multi-bagger in a few years time.

What We Can Learn From HSS Hire Group's ROCE

In summary, HSS Hire Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors appear hesitant that the trends will pick up because the stock has fallen 48% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing, we've spotted 3 warning signs facing HSS Hire Group that you might find interesting.

While HSS Hire Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.