Hagar hf's (ICE:HAGA) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Hagar hf (ICE:HAGA), it didn't seem to tick all of these boxes.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.088 = Kr4.2b ÷ (Kr64b - Kr16b) (Based on the trailing twelve months to November 2020).

Thus, Hagar hf has an ROCE of 8.8%. Even though it's in line with the industry average of 8.6%, it's still a low return by itself.

See our latest analysis for Hagar hf

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.

What Can We Tell From Hagar hf's ROCE Trend?

When we looked at the ROCE trend at Hagar hf, we didn't gain much confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 8.8%. However it looks like Hagar hf might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Hagar hf's ROCE

In summary, Hagar hf is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 27% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Hagar hf (of which 1 doesn't sit too well with us!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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