Hinduja Global Solutions (NSE:HGS) Is Investing Its Capital With Increasing Efficiency

By
Simply Wall St
Published
November 16, 2021
NSEI:HGS
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Hinduja Global Solutions' (NSE:HGS) returns on capital, so let's have a look.

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

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 Hinduja Global Solutions, this is the formula:

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

0.20 = ₹6.4b ÷ (₹46b - ₹14b) (Based on the trailing twelve months to September 2021).

Therefore, Hinduja Global Solutions has an ROCE of 20%. In absolute terms that's a great return and it's even better than the IT industry average of 12%.

View our latest analysis for Hinduja Global Solutions

roce
NSEI:HGS Return on Capital Employed November 17th 2021

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Hinduja Global Solutions has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Hinduja Global Solutions Tell Us?

The trends we've noticed at Hinduja Global Solutions are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 83% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Hinduja Global Solutions' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Hinduja Global Solutions has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Hinduja Global Solutions does have some risks though, and we've spotted 3 warning signs for Hinduja Global Solutions that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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