What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Hipages Group Holdings (ASX:HPG) so let's look a bit deeper.

Understanding 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. To calculate this metric for Hipages Group Holdings, this is the formula:

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

0.043 = AU$1.8m ÷ (AU$57m - AU$15m) (Based on the trailing twelve months to June 2021).

Therefore, Hipages Group Holdings has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 16%.

See our latest analysis for Hipages Group Holdings

In the above chart we have measured Hipages Group Holdings' 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 Hipages Group Holdings here  for free.

So How Is Hipages Group Holdings' ROCE Trending?

We're delighted to see that Hipages Group Holdings is reaping rewards from its investments and is now generating some pre-tax profits. About three years ago the company was generating losses but things have turned around because it's now earning 4.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Hipages Group Holdings is utilizing 140% more capital than it was three years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.



On a related note, the company's ratio of current liabilities to total assets has decreased to 27%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Hipages Group Holdings' ROCE

In summary, it's great to see that Hipages Group Holdings has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 20% 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. 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 to note, we've identified  1 warning sign  with Hipages Group Holdings and understanding this should be part of your investment process.

While Hipages Group 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 freelist here.

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.