Returns On Capital Are Showing Encouraging Signs At Harbor Custom Development (NASDAQ:HCDI)

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at Harbor Custom Development (NASDAQ:HCDI) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Harbor Custom Development:

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

0.03 = US$2.1m ÷ (US$128m - US$59m) (Based on the trailing twelve months to September 2021).

Therefore, Harbor Custom Development has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 15%.

Check out our latest analysis for Harbor Custom Development

Historical performance is a great place to start when researching a stock so above you can see the gauge for Harbor Custom Development's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Harbor Custom Development, check out these free graphs here.

What Does the ROCE Trend For Harbor Custom Development Tell Us?

Harbor Custom Development has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 3.0% on its capital. In addition to that, Harbor Custom Development is employing 3,774% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 46%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line On Harbor Custom Development's ROCE

Long story short, we're delighted to see that Harbor Custom Development's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 43% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Harbor Custom Development does have some risks, we noticed 5 warning signs (and 3 which are concerning) we think you should know about.

While Harbor Custom Development isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.