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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Hammond Manufacturing's (TSE:HMM.A) returns on capital, so let's have a look.
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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 Hammond Manufacturing:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CA$28m ÷ (CA$215m - CA$70m) (Based on the trailing twelve months to December 2024).
Thus, Hammond Manufacturing has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 13% it's much better.
Check out our latest analysis for Hammond Manufacturing
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hammond Manufacturing's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hammond Manufacturing.
So How Is Hammond Manufacturing's ROCE Trending?
Investors would be pleased with what's happening at Hammond Manufacturing. Over the last five years, returns on capital employed have risen substantially to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 110%. So we're very much inspired by what we're seeing at Hammond Manufacturing thanks to its ability to profitably reinvest capital.
The Bottom Line On Hammond Manufacturing's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Hammond Manufacturing has. Since the stock has returned a staggering 471% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.