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Has Hyster-Yale Materials Handling (NYSE:HY) Got What It Takes To Become A Multi-Bagger?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Hyster-Yale Materials Handling (NYSE:HY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Hyster-Yale Materials Handling:

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

0.041 = US$43m ÷ (US$1.7b - US$678m) (Based on the trailing twelve months to September 2020).

Thus, Hyster-Yale Materials Handling has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10%.

View our latest analysis for Hyster-Yale Materials Handling

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Above you can see how the current ROCE for Hyster-Yale Materials Handling compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hyster-Yale Materials Handling.

What The Trend Of ROCE Can Tell Us

In terms of Hyster-Yale Materials Handling's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 19% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Hyster-Yale Materials Handling's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Hyster-Yale Materials Handling have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 84% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Hyster-Yale Materials Handling does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is concerning...

While Hyster-Yale Materials Handling 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.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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