If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Holcim (VTX:HOLN) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Holcim:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = CHF2.9b ÷ (CHF53b - CHF8.2b) (Based on the trailing twelve months to December 2020).
Therefore, Holcim has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 9.3%.
In the above chart we have measured Holcim's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Holcim.
So How Is Holcim's ROCE Trending?
Like most people, we're pleased that Holcim is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Holcim is using 23% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
The Bottom Line On Holcim's ROCE
In a nutshell, we're pleased to see that Holcim has been able to generate higher returns from less capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 44% return over the last five years. In light of that, we think it's worth looking further into this stock because if Holcim can keep these trends up, it could have a bright future ahead.
On a final note, we've found 2 warning signs for Holcim that we think you should be aware of.
While Holcim 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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