HD Supply Holdings Inc (NASDAQ:HDS)'s Return on Capital

This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on HD Supply Holdings Inc (NASDAQ:HDS) stock.

Buying HD Supply Holdings makes you a partial owner of the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Thus, to understand how your money can grow by investing in HD Supply Holdings, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

See our latest analysis for HD Supply Holdings

HD Supply Holdings's Return On Capital Employed

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could've received, which is dependent on the gap between the return on capital you could've achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if HD Supply Holdings is good at growing investor capital. HDS’s ROCE is calculated below:

HDS’s 13.61% ROCE means that for every $100 you invest, the company creates $13.6. A good ROCE hurdle you should aim for in your investments is 15%, which HDS has just fallen short of, meaning the company creates an unideal amount of earnings from capital employed.

A deeper look

The underperforming ROCE is not ideal for HD Supply Holdings investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, HDS's ROCE may increase, in which case your portfolio could benefit from holding the company. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking at the past 3 year period shows us that HDS boosted investor return on capital employed from 3.33%. We can see that earnings have increased from US$173.00m to US$495.00m whilst capital employed fell in response to a fall in total assets , which means the company has been able to improve ROCE by growing earnings and simultaneously putting less capital to work.

Next Steps

Despite HDS's current ROCE remains at an unattractive level, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate HDS or move on to other alternatives.

1. Future Outlook: What are well-informed industry analysts predicting for HDS’s future growth? Take a look at our free research report of analyst consensus for HDS’s outlook.
2. Valuation: What is HDS worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether HDS is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.