If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Hewlett Packard Enterprise (NYSE:HPE) 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 Hewlett Packard Enterprise, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = US$2.2b ÷ (US$56b - US$20b) (Based on the trailing twelve months to April 2022).
Therefore, Hewlett Packard Enterprise has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 9.6%.
Above you can see how the current ROCE for Hewlett Packard Enterprise compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hewlett Packard Enterprise here for free.
So How Is Hewlett Packard Enterprise's ROCE Trending?
We're pretty happy with how the ROCE has been trending at Hewlett Packard Enterprise. We found that the returns on capital employed over the last five years have risen by 32%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Hewlett Packard Enterprise appears to been achieving more with less, since the business is using 28% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Bottom Line
In summary, it's great to see that Hewlett Packard Enterprise has been able to turn things around and earn higher returns on lower amounts of capital. Considering the stock has delivered 24% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
If you want to know some of the risks facing Hewlett Packard Enterprise we've found 5 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.
While Hewlett Packard Enterprise 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.
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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.