We Like These Underlying Trends At HMS Bergbau (ETR:HMU)

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at HMS Bergbau (ETR:HMU) so let's look a bit deeper.

What is 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 HMS Bergbau:

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

0.046 = €1.2m ÷ (€43m - €18m) (Based on the trailing twelve months to June 2020).

Thus, HMS Bergbau has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 9.4%.

Check out our latest analysis for HMS Bergbau

Historical performance is a great place to start when researching a stock so above you can see the gauge for HMS Bergbau's ROCE against it's prior returns. If you'd like to look at how HMS Bergbau has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is HMS Bergbau's ROCE Trending?

The fact that HMS Bergbau is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.6% on its capital. Not only that, but the company is utilizing 118% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, HMS Bergbau's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On HMS Bergbau's ROCE

In summary, it's great to see that HMS Bergbau has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, HMS Bergbau does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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