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. With that in mind, the ROCE of Brødrene Hartmann (CPH:HART) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Brødrene Hartmann:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = kr.414m ÷ (kr.2.1b - kr.479m) (Based on the trailing twelve months to September 2020).
Therefore, Brødrene Hartmann has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Packaging industry average of 12%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Brødrene Hartmann's ROCE against it's prior returns. If you'd like to look at how Brødrene Hartmann has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Brødrene Hartmann's ROCE Trending?
Brødrene Hartmann is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 25%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 35%. 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.
The Bottom Line
To sum it up, Brødrene Hartmann has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 114% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Brødrene Hartmann can keep these trends up, it could have a bright future ahead.
On a separate note, we've found 1 warning sign for Brødrene Hartmann you'll probably want to know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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