Stock Analysis

There's Been No Shortage Of Growth Recently For Harmonic's (NASDAQ:HLIT) Returns On Capital

  •  Updated
NasdaqGS:HLIT
Source: Shutterstock

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Harmonic (NASDAQ:HLIT) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Harmonic is:

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

0.064 = US$28m ÷ (US$592m - US$147m) (Based on the trailing twelve months to December 2020).

Therefore, Harmonic has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Communications industry average of 8.9%.

Check out our latest analysis for Harmonic

roce
NasdaqGS:HLIT Return on Capital Employed March 25th 2021

In the above chart we have measured Harmonic's 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 Harmonic here for free.

So How Is Harmonic's ROCE Trending?

Harmonic has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 6.4% on its capital. While returns have increased, the amount of capital employed by Harmonic has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

What We Can Learn From Harmonic's ROCE

As discussed above, Harmonic appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 132% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 2 warning signs facing Harmonic that you might find interesting.

While Harmonic 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.

If you’re looking to trade Harmonic, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


What are the risks and opportunities for Harmonic?

Harmonic Inc., together with its subsidiaries, provide video delivery software, products, system solutions, and services worldwide.

View Full Analysis

Rewards

  • Earnings are forecast to grow 56.6% per year

  • Earnings grew by 112.6% over the past year

Risks

  • Shareholders have been diluted in the past year

  • Significant insider selling over the past 3 months

View all Risks and Rewards

Share Price

Market Cap

1Y Return

View Company Report