If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating HireQuest (NASDAQ:HQI), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for HireQuest:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.16 = US$11m ÷ (US$105m - US$37m) (Based on the trailing twelve months to September 2023).

Therefore, HireQuest has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 13% it's much better.

See our latest analysis for HireQuest

Above you can see how the current ROCE for HireQuest 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 HireQuest for free.

What Can We Tell From HireQuest's ROCE Trend?

On the surface, the trend of ROCE at HireQuest doesn't inspire confidence. To be more specific, ROCE has fallen from 49% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, HireQuest has done well to pay down its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From HireQuest's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for HireQuest. However, despite the promising trends, the stock has fallen 22% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.