HORNBACH Baumarkt (ETR:HBM) Might Have The Makings Of A Multi-Bagger

By
Simply Wall St
Published
November 24, 2021
XTRA:HBM
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, HORNBACH Baumarkt (ETR:HBM) looks quite promising in regards to its trends of return on capital.

Understanding 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. The formula for this calculation on HORNBACH Baumarkt is:

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

0.085 = €274m ÷ (€4.0b - €787m) (Based on the trailing twelve months to August 2021).

Thus, HORNBACH Baumarkt has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Specialty Retail industry average of 9.5%.

View our latest analysis for HORNBACH Baumarkt

roce
XTRA:HBM Return on Capital Employed November 25th 2021

Above you can see how the current ROCE for HORNBACH Baumarkt 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 HORNBACH Baumarkt here for free.

So How Is HORNBACH Baumarkt's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 108% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

To sum it up, HORNBACH Baumarkt 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 51% return over the last five years. In light of that, we think it's worth looking further into this stock because if HORNBACH Baumarkt can keep these trends up, it could have a bright future ahead.

While HORNBACH Baumarkt looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether HBM is currently trading for a fair price.

While HORNBACH Baumarkt 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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