Hagar hf (ICE:HAGA) Might Be Having Difficulty Using Its Capital Effectively

By
Simply Wall St
Published
March 16, 2022
ICSE:HAGA
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Hagar hf (ICE:HAGA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. Analysts use this formula to calculate it for Hagar hf:

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

0.13 = Kr6.1b ÷ (Kr66b - Kr18b) (Based on the trailing twelve months to November 2021).

Therefore, Hagar hf has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 10% it's much better.

Check out our latest analysis for Hagar hf

roce
ICSE:HAGA Return on Capital Employed March 16th 2022

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

So How Is Hagar hf's ROCE Trending?

In terms of Hagar hf's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 25%, but since then they've fallen to 13%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Hagar hf's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hagar hf. And the stock has followed suit returning a meaningful 67% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Hagar hf, we've discovered 1 warning sign that you should be aware of.

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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