If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Speaking of which, we noticed some great changes in Hudson Technologies' (NASDAQ:HDSN) returns on capital, so let's have a look.
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 Hudson Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$37m ÷ (US$309m - US$47m) (Based on the trailing twelve months to September 2024).
Thus, Hudson Technologies has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Trade Distributors industry average of 12%.
Above you can see how the current ROCE for Hudson Technologies 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 Hudson Technologies for free.
What Can We Tell From Hudson Technologies' ROCE Trend?
We're delighted to see that Hudson Technologies is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 14% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Hudson Technologies is utilizing 334% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a related note, the company's ratio of current liabilities to total assets has decreased to 15%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Hudson Technologies has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line
Overall, Hudson Technologies gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a final note, we found 2 warning signs for Hudson Technologies (1 is a bit unpleasant) you should be aware of.
While Hudson Technologies 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.
