Stock Analysis

Here's What To Make Of Hammond Power Solutions' (TSE:HPS.A) Decelerating Rates Of Return

TSX:HPS.A
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Hammond Power Solutions (TSE:HPS.A) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Hammond Power Solutions:

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

0.097 = CA$12m ÷ (CA$189m - CA$67m) (Based on the trailing twelve months to December 2020).

So, Hammond Power Solutions has an ROCE of 9.7%. On its own, that's a low figure but it's around the 9.2% average generated by the Electrical industry.

View our latest analysis for Hammond Power Solutions

roce
TSX:HPS.A Return on Capital Employed April 30th 2021

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 Hammond Power Solutions has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Hammond Power Solutions' ROCE Trending?

There hasn't been much to report for Hammond Power Solutions' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Hammond Power Solutions doesn't end up being a multi-bagger in a few years time.

The Bottom Line

In a nutshell, Hammond Power Solutions has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 97% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Hammond Power Solutions, we've discovered 2 warning signs that you should be aware of.

While Hammond Power Solutions 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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