Yahoo Finance Is HomeServe (LON:HSV) Likely To Turn Things Around?
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of HomeServe (LON:HSV) looks decent, right now, so lets see what the trend of returns can tell us.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on HomeServe is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = UK£175m ÷ (UK£1.8b - UK£472m) (Based on the trailing twelve months to March 2020).
Therefore, HomeServe has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 11% generated by the Commercial Services industry.
See our latest analysis for HomeServe
In the above chart we have measured HomeServe's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For HomeServe Tell Us?
While the returns on capital are good, they haven't moved much. The company has employed 149% more capital in the last five years, and the returns on that capital have remained stable at 13%. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
On a side note, HomeServe has done well to reduce current liabilities to 26% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
In Conclusion...
The main thing to remember is that HomeServe has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 213% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
Like most companies, HomeServe does come with some risks, and we've found 1 warning sign that you should be aware of.
While HomeServe 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.
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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