Returns on Capital Paint A Bright Future For HMS Networks (STO:HMS)

What are the early trends we should look for to identify a stock that could 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of HMS Networks (STO:HMS) looks great, so lets see what the trend can tell us.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for HMS Networks:

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

0.35 = kr804m ÷ (kr3.1b - kr821m) (Based on the trailing twelve months to September 2023).

Thus, HMS Networks has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

Check out our latest analysis for HMS Networks

In the above chart we have measured HMS Networks' 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 HMS Networks here for free.

The Trend Of ROCE

The trends we've noticed at HMS Networks are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 35%. The amount of capital employed has increased too, by 77%. So we're very much inspired by what we're seeing at HMS Networks thanks to its ability to profitably reinvest capital.

What We Can Learn From HMS Networks' ROCE

To sum it up, HMS Networks has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 2 warning signs for HMS Networks (1 shouldn't be ignored) you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.