Investors Could Be Concerned With Hosken Passenger Logistics and Rail's (JSE:HPR) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Hosken Passenger Logistics and Rail (JSE:HPR) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Hosken Passenger Logistics and Rail, this is the formula:

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

0.16 = R293m ÷ (R2.3b - R421m) (Based on the trailing twelve months to March 2021).

So, Hosken Passenger Logistics and Rail has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Transportation industry average of 7.4% it's much better.

Check out our latest analysis for Hosken Passenger Logistics and Rail

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hosken Passenger Logistics and Rail's ROCE against it's prior returns. If you're interested in investigating Hosken Passenger Logistics and Rail's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Hosken Passenger Logistics and Rail's ROCE Trending?

When we looked at the ROCE trend at Hosken Passenger Logistics and Rail, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 16% from 25% four years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Hosken Passenger Logistics and Rail's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Hosken Passenger Logistics and Rail have fallen, meanwhile the business is employing more capital than it was four years ago. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 26% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Hosken Passenger Logistics and Rail (including 1 which is concerning) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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