Returns On Capital At Hawesko Holding (ETR:HAW) Paint An Interesting Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Hawesko Holding (ETR:HAW), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Hawesko Holding is:

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

0.18 = €46m ÷ (€382m - €131m) (Based on the trailing twelve months to September 2020).

So, Hawesko Holding has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 8.5% it's much better.

See our latest analysis for Hawesko Holding

Above you can see how the current ROCE for Hawesko Holding 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 The Trend Of ROCE Can Tell Us

In terms of Hawesko Holding's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 31% over the last five years. However it looks like Hawesko Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Hawesko Holding has done well to pay down its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Hawesko Holding's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 26% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Hawesko Holding, we've discovered 1 warning sign that you should be aware of.

While Hawesko Holding 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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