Hafnia's (OB:HAFNI) Returns On Capital Are Heading Higher

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Hafnia (OB:HAFNI) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Hafnia:

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

0.071 = US$243m ÷ (US$4.1b - US$643m) (Based on the trailing twelve months to June 2022).

So, Hafnia has an ROCE of 7.1%. On its own, that's a low figure but it's around the 8.3% average generated by the Oil and Gas industry.

Our analysis indicates that HAFNI is potentially undervalued!

In the above chart we have measured Hafnia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hafnia here for free.

What Can We Tell From Hafnia's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last four years, returns on capital employed have risen substantially to 7.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 210%. So we're very much inspired by what we're seeing at Hafnia thanks to its ability to profitably reinvest capital.

Our Take On Hafnia's ROCE

To sum it up, Hafnia has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 217% total return over the last year tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Hafnia can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 4 warning signs we've spotted with Hafnia (including 3 which don't sit too well with us) .

While Hafnia 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.