There are a few key trends to look for if we want to identify the next 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Hamilton Beach Brands Holding (NYSE:HBB), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Hamilton Beach Brands Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$43m ÷ (US$382m - US$160m) (Based on the trailing twelve months to September 2021).
Thus, Hamilton Beach Brands Holding has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 15% generated by the Consumer Durables industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hamilton Beach Brands Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hamilton Beach Brands Holding, check out these free graphs here.
What Can We Tell From Hamilton Beach Brands Holding's ROCE Trend?
In terms of Hamilton Beach Brands Holding's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 19% from 32% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, Hamilton Beach Brands Holding has decreased its current liabilities to 42% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.
What We Can Learn From Hamilton Beach Brands Holding's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Hamilton Beach Brands Holding is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 44% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
One final note, you should learn about the 5 warning signs we've spotted with Hamilton Beach Brands Holding (including 3 which are concerning) .
While Hamilton Beach Brands Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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