There's Been No Shortage Of Growth Recently For Hensoldt's (ETR:5UH) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Hensoldt's (ETR:5UH) returns on capital, so let's have a look.

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. To calculate this metric for Hensoldt, this is the formula:

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

0.043 = €69m ÷ (€2.7b - €1.1b) (Based on the trailing twelve months to June 2021).

Thus, Hensoldt has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 8.7%.

Check out our latest analysis for Hensoldt

In the above chart we have measured Hensoldt's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hensoldt here for free.

What Does the ROCE Trend For Hensoldt Tell Us?

While there are companies with higher returns on capital out there, we still find the trend at Hensoldt promising. More specifically, while the company has kept capital employed relatively flat over the last two years, the ROCE has climbed 57% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a separate but related note, it's important to know that Hensoldt has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Hensoldt's ROCE

In summary, we're delighted to see that Hensoldt has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 27% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Hensoldt can keep these trends up, it could have a bright future ahead.

While Hensoldt looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 5UH is currently trading for a fair price.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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