Investors Will Want HOV Services' (NSE:HOVS) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at HOV Services (NSE:HOVS) so let's look a bit deeper.

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. The formula for this calculation on HOV Services is:

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

0.026 = ₹27m ÷ (₹1.2b - ₹140m) (Based on the trailing twelve months to March 2021).

Therefore, HOV Services has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the IT industry average of 11%.

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 want to delve into the historical earnings, revenue and cash flow of HOV Services, check out these free graphs here.

The Trend Of ROCE

It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. We found that the returns on capital employed over the last five years have risen by 1,494%. The company is now earning ₹0.03 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 70% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Key Takeaway

In summary, it's great to see that HOV Services has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 50% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

HOV Services does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

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. 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.
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