What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Dr. Hönle (ETR:HNL) and its ROCE trend, we weren't exactly thrilled.
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 Dr. Hönle:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00064 = €113k ÷ (€203m - €28m) (Based on the trailing twelve months to September 2021).
So, Dr. Hönle has an ROCE of 0.06%. Ultimately, that's a low return and it under-performs the Electrical industry average of 9.0%.
View our latest analysis for Dr. Hönle
In the above chart we have measured Dr. Hönle'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 Dr. Hönle.
The Trend Of ROCE
When we looked at the ROCE trend at Dr. Hönle, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 0.06%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Dr. Hönle is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 1.2% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
If you want to continue researching Dr. Hönle, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Dr. Hönle 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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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.
About XTRA:HNL
Dr. Hönle
Engages in the supply of industrial UV technologies and systems in Germany and internationally.
Undervalued with reasonable growth potential.
