Will the Promising Trends At home24 (ETR:H24) Continue?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in home24's (ETR:H24) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on home24 is:

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

0.066 = €6.7m ÷ (€206m - €105m) (Based on the trailing twelve months to September 2020).

Therefore, home24 has an ROCE of 6.6%. On its own, that's a low figure but it's around the 7.9% average generated by the Online Retail industry.

View our latest analysis for home24

Above you can see how the current ROCE for home24 compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering home24 here for free.

What Can We Tell From home24's ROCE Trend?

We're delighted to see that home24 is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 6.6% on its capital. Not only that, but the company is utilizing 71% 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 separate but related note, it's important to know that home24 has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From home24's ROCE

Long story short, we're delighted to see that home24's reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last year, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching home24, you might be interested to know about the 2 warning signs that our analysis has discovered.

While home24 may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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