There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Hertz Global Holdings (NASDAQ:HTZ) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Hertz Global Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$2.1b ÷ (US$22b - US$2.3b) (Based on the trailing twelve months to December 2022).
Therefore, Hertz Global Holdings has an ROCE of 10%. In isolation, that's a pretty standard return but against the Transportation industry average of 14%, it's not as good.
See our latest analysis for Hertz Global Holdings
In the above chart we have measured Hertz Global Holdings' 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.
So How Is Hertz Global Holdings' ROCE Trending?
Hertz Global Holdings has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 939% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line
To sum it up, Hertz Global Holdings is collecting higher returns from the same amount of capital, and that's impressive. Astute investors may have an opportunity here because the stock has declined 30% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to know some of the risks facing Hertz Global Holdings we've found 4 warning signs (3 are significant!) that you should be aware of before investing here.
While Hertz Global Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.