If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Hanger (NYSE:HNGR) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Hanger, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = US$77m ÷ (US$943m – US$211m) (Based on the trailing twelve months to September 2021).
Thus, Hanger has an ROCE of 11%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Healthcare industry average of 12%.
In the above chart we have measured Hanger’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 Hanger here for free.
What The Trend Of ROCE Can Tell Us
The trends we’ve noticed at Hanger are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 21%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
Our Take On Hanger’s ROCE
In summary, it’s great to see that Hanger can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 61% to shareholders over the last five years, it’s fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you want to continue researching Hanger, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Hanger isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.