HOV Services (NSE:HOVS) Is Doing The Right Things To Multiply Its Share Price

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So when we looked at HOV Services (NSE:HOVS) and its trend of ROCE, we really liked what we saw.

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 HOV Services:

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

0.035 = ₹32m ÷ (₹1.1b - ₹144m) (Based on the trailing twelve months to September 2021).

So, HOV Services has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.

View our latest analysis for HOV Services

Historical performance is a great place to start when researching a stock so above you can see the gauge for HOV Services' ROCE against it's prior returns. If you're interested in investigating HOV Services' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. The figures show that over the last five years, returns on capital have grown by 1,591%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 51% less than it was five years ago, which can be indicative of a business that's improving its efficiency. HOV Services may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

In Conclusion...

From what we've seen above, HOV Services has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 40% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, HOV Services does come with some risks, and we've found 3 warning signs that you should be aware of.

While HOV Services 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.