Brødrene Hartmann (CPH:HART) May Have Issues Allocating Its Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Brødrene Hartmann (CPH:HART), 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. The formula for this calculation on Brødrene Hartmann is:

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

0.028 = kr.68m ÷ (kr.3.2b - kr.804m) (Based on the trailing twelve months to September 2022).

Therefore, Brødrene Hartmann has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 11%.

View our latest analysis for Brødrene Hartmann

Above you can see how the current ROCE for Brødrene Hartmann compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Brødrene Hartmann.

So How Is Brødrene Hartmann's ROCE Trending?

When we looked at the ROCE trend at Brødrene Hartmann, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Brødrene Hartmann's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Brødrene Hartmann is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 6.0% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to continue researching Brødrene Hartmann, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

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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.