Here’s What’s Worried About HireQuest’s Return on Capital (NASDAQ: HQI)
There are a few key trends to look for if we are to identify the next multi-bagger. First, we would like to identify a growth to come back on capital employed (ROCE) and at the same time, a based capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. That said, from the first glance at HireQuest (NASDAQ: HQI) We’re not jumping from our chairs on the yield trend, but taking a closer look.
Understanding Return on Capital Employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. Analysts use this formula to calculate it for HireQuest:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.14 = US $ 6.4 million ÷ (US $ 62 million – US $ 18 million) (Based on the last twelve months up to March 2021).
So, HireQuest has a ROCE of 14%. In absolute terms, this is a satisfactory performance, but compared to the professional services industry average of 11%, it is much better.
Check out our latest review for HireQuest
Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to dig deeper into HireQuest’s past, check out this free graph of past income, income and cash flow.
The ROCE trend
On the surface, the ROCE trend at HireQuest does not inspire confidence. To be more precise, ROCE has increased from 29% over the past three years. And given that incomes have fallen while employing more capital, we would be cautious. This could mean that the company is losing its competitive advantage or market share, because even if more money is invested in companies, it actually produces a lower return – “less bang for the buck” per se.
On a side note, HireQuest has done well in repaying its current liabilities at 29% of total assets. So we could link some of that to the decrease in ROCE. In effect, this means that their suppliers or short-term creditors fund the business less, which reduces some elements of risk. Since the company essentially finances a larger portion of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE.
HireQuest ROCE result
In summary, we are somewhat concerned about the diminishing returns of HireQuest on increasing amounts of capital. The market must be optimistic about the future of the stock because while the underlying trends are not very encouraging, the stock has climbed 246%. Either way, we don’t feel very comfortable with the fundamentals so we’re avoiding this title for now.
HireQuest might be attractively priced in other ways, so you might find our free estimate of intrinsic value on our platform quite valuable.
While HireQuest does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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