Stock Analysis

Has HRnetGroup (SGX:CHZ) Got What It Takes To Become A Multi-Bagger?

SGX:CHZ
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at HRnetGroup (SGX:CHZ) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for HRnetGroup, this is the formula:

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

0.15 = S$47m ÷ (S$423m - S$98m) (Based on the trailing twelve months to June 2020).

So, HRnetGroup has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Professional Services industry average of 13%.

Check out our latest analysis for HRnetGroup

roce
SGX:CHZ Return on Capital Employed January 4th 2021

In the above chart we have measured HRnetGroup's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for HRnetGroup.

How Are Returns Trending?

When we looked at the ROCE trend at HRnetGroup, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 15% from 32% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From HRnetGroup's ROCE

Bringing it all together, while we're somewhat encouraged by HRnetGroup's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 24% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 1 warning sign for HRnetGroup that we think you should be aware of.

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