Hamilton Thorne (CVE:HTL) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Hamilton Thorne (CVE:HTL) and its ROCE trend, we weren't exactly thrilled.

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 Hamilton Thorne:

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

0.049 = US$2.9m ÷ (US$70m - US$12m) (Based on the trailing twelve months to December 2020).

Thus, Hamilton Thorne has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.4%.

See our latest analysis for Hamilton Thorne

Above you can see how the current ROCE for Hamilton Thorne compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hamilton Thorne.

What Does the ROCE Trend For Hamilton Thorne Tell Us?

We weren't thrilled with the trend because Hamilton Thorne's ROCE has reduced by 80% over the last five years, while the business employed 988% more capital. Usually this isn't ideal, but given Hamilton Thorne conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Hamilton Thorne might not have received a full period of earnings contribution from it.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Hamilton Thorne is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 947% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 2 warning signs for Hamilton Thorne that we think you should be aware of.

While Hamilton Thorne 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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