Harvey Norman Holdings’ ROCE Trends Indicate Long-Term Value Growth Potential
One key factor to consider when identifying stocks that have the potential to multiply in value over the long term is the trend in returns on capital employed (ROCE). If a company’s ROCE is increasing, along with a growing amount of capital employed, it signifies that the business is reinvesting profits at higher rates of return. This can be a strong indicator of long-term value growth.
In this regard, Harvey Norman Holdings (ASX:HVN) appears to be showing decent performance. Let’s take a closer look at the trend of returns to gain insights into the company’s potential.
To better understand ROCE, it is important to note that it is a metric that evaluates the percentage of pre-tax income a company earns on the capital invested in its business. For Harvey Norman Holdings, the calculation is as follows:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Based on the trailing twelve months to December 2022, Harvey Norman Holdings has an ROCE of 14%. While this may seem like a normal return in absolute terms, it is worth noting that it is slightly above the Multiline Retail industry average of 12%.
While the current returns on capital are decent, they have remained relatively stable without significant changes. Over the past five years, Harvey Norman Holdings has increased its capital employed by 91%, while the returns on that capital have remained steady at 14%. While a 14% return is considered standard, the consistent nature of this return is reassuring. Although such returns may not be overly exciting over long periods, they can pay off in terms of share price appreciation, especially when consistency is maintained.
What stands out is Harvey Norman Holdings’ ability to continually reinvest capital at respectable rates of return. This trend has resulted in a respectable 57% return for shareholders who have held the stock over the past five years. It is encouraging to see that investors are recognizing these promising trends. However, further research is still recommended to fully understand the potential of the stock.
In conclusion, the ROCE trends of Harvey Norman Holdings indicate the potential for long-term value growth. The company has consistently reinvested profits at respectable rates of return, which has translated into favorable returns for shareholders. While investors have taken notice of these trends, conducting thorough research remains crucial to make informed investment decisions.
Disclaimer: This article does not provide investment advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions.
