Our Take On The Returns On Capital At Hydraulic Elements and Systems AD (BUL:4HE)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, the ROCE of Hydraulic Elements and Systems AD (BUL:4HE) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Hydraulic Elements and Systems AD, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = лв4.8m ÷ (лв48m - лв8.5m) (Based on the trailing twelve months to September 2020).

So, Hydraulic Elements and Systems AD has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 8.5% it's much better.

View our latest analysis for Hydraulic Elements and Systems AD

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Hydraulic Elements and Systems AD has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Hydraulic Elements and Systems AD Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 20% in that time. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Hydraulic Elements and Systems AD's ROCE

In the end, Hydraulic Elements and Systems AD has proven its ability to adequately reinvest capital at good rates of return. Therefore it's no surprise that shareholders have earned a respectable 77% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Like most companies, Hydraulic Elements and Systems AD does come with some risks, and we've found 1 warning sign that you should be aware of.

While Hydraulic Elements and Systems AD 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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