Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Hamilton Thorne (CVE:HTL), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hamilton Thorne is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = US$2.4m ÷ (US$87m - US$13m) (Based on the trailing twelve months to March 2023).
Therefore, Hamilton Thorne has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.7%.
Above you can see how the current ROCE for Hamilton Thorne 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 Hamilton Thorne here for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Hamilton Thorne doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 3.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hamilton Thorne. In light of this, the stock has only gained 18% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
If you want to continue researching Hamilton Thorne, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Hamilton Thorne 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.
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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.