Returns On Capital At Hosken Consolidated Investments (JSE:HCI) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Hosken Consolidated Investments (JSE:HCI) and its ROCE trend, we weren't exactly thrilled.

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

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. To calculate this metric for Hosken Consolidated Investments, this is the formula:

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

0.099 = R4.2b ÷ (R49b - R6.2b) (Based on the trailing twelve months to September 2022).

Thus, Hosken Consolidated Investments has an ROCE of 9.9%. Ultimately, that's a low return and it under-performs the Industrials industry average of 14%.

Check out our latest analysis for Hosken Consolidated Investments

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

The Trend Of ROCE

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 31% in that same period. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 9.9%, it's hard to get excited about these developments.

The Bottom Line On Hosken Consolidated Investments' ROCE

It's a shame to see that Hosken Consolidated Investments is effectively shrinking in terms of its capital base. Unsurprisingly, the stock has only gained 22% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we found 3 warning signs for Hosken Consolidated Investments (1 is a bit concerning) you should be aware of.

While Hosken Consolidated Investments 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.