Will Hagar hf (ICE:HAGA) Multiply In Value Going Forward?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Hagar hf (ICE:HAGA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Hagar hf, this is the formula:

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

0.094 = Kr4.5b ÷ (Kr62b - Kr15b) (Based on the trailing twelve months to August 2020).

Thus, Hagar hf has an ROCE of 9.4%. Even though it's in line with the industry average of 9.3%, it's still a low return by itself.

View our latest analysis for Hagar hf

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're interested in investigating Hagar hf's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Hagar hf Tell Us?

On the surface, the trend of ROCE at Hagar hf doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Hagar hf's ROCE

To conclude, we've found that Hagar hf is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 43% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

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 is significant!) that you should know about.

While Hagar hf isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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