There are a few key trends to look for if we want to identify the next 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Dr. Hönle (ETR:HNL), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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)
0.00094 = €168k ÷ (€211m - €33m) (Based on the trailing twelve months to June 2022).
So, Dr. Hönle has an ROCE of 0.09%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 10%.
Check out the opportunities and risks within the DE Electrical industry.
Above you can see how the current ROCE for Dr. Hönle compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Dr. Hönle's ROCE Trend?
In terms of Dr. Hönle's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. 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 Bottom Line On Dr. Hönle's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Dr. Hönle. These growth trends haven't led to growth returns though, since the stock has fallen 54% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Dr. Hönle does have some risks though, and we've spotted 1 warning sign for Dr. Hönle that you might be interested in.
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.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
