Investors Will Want HireRight Holdings' (NYSE:HRT) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at HireRight Holdings (NYSE:HRT) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for HireRight Holdings, this is the formula:

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

0.06 = US$84m ÷ (US$1.6b - US$152m) (Based on the trailing twelve months to September 2023).

Therefore, HireRight Holdings has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 13%.

See our latest analysis for HireRight Holdings

Above you can see how the current ROCE for HireRight Holdings 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 HireRight Holdings here for free.

So How Is HireRight Holdings' ROCE Trending?

HireRight Holdings has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last three years, the ROCE has climbed 448% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

To sum it up, HireRight Holdings is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 23% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if HireRight Holdings can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing HireRight Holdings we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While HireRight 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.