There are a few key trends to look for if we are to identify the next multi-bagger. First, we will want to see a return on capital employed (ROCE) which increases and, on the other hand, a based capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Therefore, when we briefly examined Halma (LON: HLMA) Trend ROCE, we were pretty happy with what we saw.
Understanding Return on Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for Halma:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.14 = £ 230million (£ 1.9bn – £ 291million) (Based on the last twelve months up to March 2021).
So, Halma has a ROCE of 14%. This is a fairly standard return and it is in line with the industry average of 14%.
See our latest review for Halma
Above you can see how Halma’s current ROCE compares to her previous returns on capital, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
So what’s the trend for Halma’s ROCE?
While the returns on capital are good, they haven’t budged much. The company has employed 77% more capital over the past five years and returns on that capital have remained stable at 14%. 14% is pretty standard return, and it’s reassuring to know that Halma has always earned that amount. Stable returns in this basic stage can be unattractive, but if they can be sustained over the long term, they often offer nice rewards for shareholders.
The bottom line
To sum up, Halma simply reinvested capital regularly, at these decent rates of return. And the stock has performed incredibly well with a 200% return over the past five years, so long-term investors are undoubtedly delighted with the result. So while the stock may be “more expensive” than it used to be, we believe that the strong fundamentals warrant further research into this stock.
While Halma isn’t too shining in this regard, it’s still worth seeing if the company is trading at attractive prices. You can find out with our FREE estimate of intrinsic value on our platform.
While Halma does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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