Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at Howden Joinery Group (LON:HWDN), we liked what we saw.
Understanding 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. To calculate this metric for Howden Joinery Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.38 = UK£260m ÷ (UK£944m – UK£262m) (Based on the trailing twelve months to December 2019).
Therefore, Howden Joinery Group has an ROCE of 38%. That’s a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
Above you can see how the current ROCE for Howden Joinery Group compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Howden Joinery Group Tell Us?
We’d be pretty happy with returns on capital like Howden Joinery Group. The company has consistently earned 38% for the last five years, and the capital employed within the business has risen 52% in that time. Now considering ROCE is an attractive 38%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn’t surprise us if the company became a multi-bagger.
Our Take On Howden Joinery Group’s ROCE
In the end, the company has proven it can reinvest it’s capital at high rates of returns, which you’ll remember is a trait of a multi-bagger. In light of this, the stock has only gained 13% over the last five years for shareholders who have owned the stock in this period. So because of the trends we’re seeing, we’d recommend looking further into this stock to see if it has the makings of a multi-bagger.
Howden Joinery Group does have some risks though, and we’ve spotted 1 warning sign for Howden Joinery Group that you might be interested in.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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