If we are to find multi-bagger potential, there are often underlying trends that can provide clues. First, we would like to identify a growth to recover on capital employed (ROCE) and at the same time, a based capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. So when we looked Haverty furniture companies (NYSE: HVT) and its trend of ROCE, we really liked what we saw.
Understanding Return on Capital Employed (ROCE)
If you’ve never worked with ROCE before, it measures the âreturnâ (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for Haverty furniture companies:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.20 = US $ 105 million Ã· (US $ 761 million – US $ 235 million) (Based on the last twelve months up to June 2021).
So, Haverty Furniture Companies has a ROCE of 20%. In absolute terms, this is a fairly normal return, and it is somewhat close to the specialty retail sector average of 18%.
NYSE: HVT Return on Capital Employee October 29, 2021
Above you can see how Haverty furniture companies’ current ROCE compares to its previous returns on equity, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What does the ROCE trend tell us for Haverty furniture companies?
We love the trends we see at Haverty Furniture Companies. Over the past five years, returns on capital employed have increased substantially to 20%. The company actually makes more money per dollar of capital employed, and it should be noted that the amount of capital has also increased, by 44%. Increasing returns on an increasing amount of capital are common among multi-baggers and that is why we are impressed.
By the way, we’ve noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. In effect, this means that suppliers or short-term creditors now finance 31% of the business, which is more than five years ago. Keep an eye out for future increases, because when the ratio of current liabilities to total assets becomes particularly high, it can introduce new risks to the business.
The result on the ROCE of Haverty furniture companies
To sum up, Haverty Furniture Companies has proven that it can reinvest in the business and generate higher returns on capital employed, which is great. And as the stock has performed exceptionally well over the past five years, these trends are being taken into account by investors. So, given that the stock has proven to have some promising trends, it’s worth doing more research on the company to see if these trends are likely to persist.
If you want to know more about Haverty Furniture Companies, we have spotted 3 warning signs, and 1 of them should not be ignored.
If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.