What Do The Returns On Capital At Hammond Manufacturing (TSE:HMM.A) Tell Us?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at Hammond Manufacturing (TSE:HMM.A) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hammond Manufacturing is:

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

0.10 = CA$7.8m ÷ (CA$114m - CA$39m) (Based on the trailing twelve months to September 2020).

So, Hammond Manufacturing has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electrical industry average of 9.4%.

View 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, revenue and cash flow of Hammond Manufacturing, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Hammond Manufacturing's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like Hammond Manufacturing might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Hammond Manufacturing is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 11% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to continue researching Hammond Manufacturing, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Hammond Manufacturing 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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