Here's What's Concerning About HireQuest's (NASDAQ:HQI) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at HireQuest (NASDAQ:HQI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 HireQuest:

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

0.14 = US$6.4m ÷ (US$62m - US$18m) (Based on the trailing twelve months to March 2021).

Thus, HireQuest has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 11% it's much better.

Check out our latest analysis for HireQuest

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating HireQuest's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at HireQuest doesn't inspire confidence. To be more specific, ROCE has fallen from 29% over the last three years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, HireQuest has done well to pay down its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On HireQuest's ROCE

In summary, we're somewhat concerned by HireQuest's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 246%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

HireQuest could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While HireQuest 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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