Returns On Capital At Heidrick & Struggles International (NASDAQ:HSII) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. That's why when we briefly looked at Heidrick & Struggles International's (NASDAQ:HSII) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Heidrick & Struggles International is:

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

0.16 = US$100m ÷ (US$891m - US$260m) (Based on the trailing twelve months to March 2023).

So, Heidrick & Struggles International has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 12% it's much better.

Check out our latest analysis for Heidrick & Struggles International

In the above chart we have measured Heidrick & Struggles International'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 Heidrick & Struggles International.

What Can We Tell From Heidrick & Struggles International's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 84% more capital into its operations. 16% is a pretty standard return, and it provides some comfort knowing that Heidrick & Struggles International has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

To sum it up, Heidrick & Struggles International has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last five years the stock has declined 29%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Heidrick & Struggles International does have some risks though, and we've spotted 2 warning signs for Heidrick & Struggles International that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.