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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Hyster-Yale Materials Handling (NYSE:HY) and its ROCE trend, we weren't exactly thrilled.
What is Return On Capital Employed (ROCE)?
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 Hyster-Yale Materials Handling:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = US$25m ÷ (US$1.9b - US$823m) (Based on the trailing twelve months to March 2021).
Therefore, Hyster-Yale Materials Handling has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.7%.
In the above chart we have measured Hyster-Yale Materials Handling's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hyster-Yale Materials Handling here for free.
So How Is Hyster-Yale Materials Handling's ROCE Trending?
In terms of Hyster-Yale Materials Handling's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.4% from 15% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a side note, Hyster-Yale Materials Handling's current liabilities are still rather high at 44% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Hyster-Yale Materials Handling's ROCE
We're a bit apprehensive about Hyster-Yale Materials Handling because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 39% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
One more thing, we've spotted 3 warning signs facing Hyster-Yale Materials Handling that you might find interesting.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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.
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