What Do The Returns At HORNBACH Holding KGaA (ETR:HBH) Mean Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at HORNBACH Holding KGaA (ETR:HBH) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on HORNBACH Holding KGaA is:

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

0.12 = €388m ÷ (€4.1b - €877m) (Based on the trailing twelve months to November 2020).

So, HORNBACH Holding KGaA has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Specialty Retail industry.

Check out our latest analysis for HORNBACH Holding KGaA

In the above chart we have measured HORNBACH Holding KGaA'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 HORNBACH Holding KGaA.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at HORNBACH Holding KGaA. The data shows that returns on capital have increased substantially over the last five years to 12%. The amount of capital employed has increased too, by 67%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

To sum it up, HORNBACH Holding KGaA has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 60% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we found 2 warning signs for HORNBACH Holding KGaA (1 is significant) you should be aware of.

While HORNBACH Holding KGaA isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you’re looking to trade HORNBACH Holding KGaA, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.