There Are Reasons To Feel Uneasy About HRnetGroup's (SGX:CHZ) Returns On Capital

There are a few key trends to look for if we want to identify the next 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating HRnetGroup (SGX:CHZ), we don't think it's current trends fit the mold of a multi-bagger.

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 HRnetGroup:

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

0.13 = S$45m ÷ (S$452m - S$102m) (Based on the trailing twelve months to December 2020).

So, HRnetGroup has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 14% generated by the Professional Services industry.

View our latest analysis for HRnetGroup

Above you can see how the current ROCE for HRnetGroup compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering HRnetGroup here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at HRnetGroup, we didn't gain much confidence. Around five years ago the returns on capital were 33%, but since then they've fallen to 13%. However it looks like HRnetGroup 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that HRnetGroup is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 1.3% in the last three 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.

If you want to continue researching HRnetGroup, you might be interested to know about the 1 warning sign that our analysis has discovered.

While HRnetGroup 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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