We Like These Underlying Return On Capital Trends At Herc Holdings (NYSE:HRI)

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Herc Holdings (NYSE:HRI) and its trend of ROCE, we really liked what we saw.

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

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 Herc Holdings:

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

0.10 = US$663m ÷ (US$6.9b - US$538m) (Based on the trailing twelve months to September 2023).

So, Herc Holdings has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Trade Distributors industry average of 13%.

View our latest analysis for Herc Holdings

In the above chart we have measured Herc Holdings' 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 Herc Holdings here for free.

What Does the ROCE Trend For Herc Holdings Tell Us?

We like the trends that we're seeing from Herc Holdings. Over the last five years, returns on capital employed have risen substantially to 10%. The amount of capital employed has increased too, by 88%. So we're very much inspired by what we're seeing at Herc Holdings thanks to its ability to profitably reinvest capital.

In Conclusion...

All in all, it's terrific to see that Herc Holdings is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 322% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Herc Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

While Herc Holdings 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.