If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Hiolle Industries' (EPA:ALHIO) returns on capital, so let's have a look.
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. To calculate this metric for Hiolle Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = €6.5m ÷ (€73m - €32m) (Based on the trailing twelve months to June 2019).
Therefore, Hiolle Industries has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Machinery industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hiolle Industries' ROCE against it's prior returns. If you're interested in investigating Hiolle Industries' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Hiolle Industries' ROCE Trending?
The trends we've noticed at Hiolle Industries are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. The amount of capital employed has increased too, by 34%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.On a side note, Hiolle Industries' current liabilities are still rather high at 44% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
All in all, it's terrific to see that Hiolle Industries is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 19% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Like most companies, Hiolle Industries does come with some risks, and we've found 3 warning signs that you should be aware of.
While Hiolle Industries 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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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.
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