Hornby (LON:HRN) Is Looking To Continue Growing Its Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Hornby (LON:HRN) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hornby:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = UK£1.2m ÷ (UK£54m - UK£7.9m) (Based on the trailing twelve months to March 2022).
So, Hornby has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Leisure industry average of 18%.
Check out our latest analysis for Hornby
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Hornby's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Hornby Tell Us?
Hornby has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 2.6% which is a sight for sore eyes. Not only that, but the company is utilizing 55% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In Conclusion...
In summary, it's great to see that Hornby has managed to break into profitability and is continuing to reinvest in its business. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Hornby does have some risks though, and we've spotted 1 warning sign for Hornby that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
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