Returns At H&K (EPA:MLHK) Appear To Be Weighed Down

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, while the ROCE is currently high for H&K (EPA:MLHK), we aren't jumping out of our chairs because returns are decreasing.

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 H&K, this is the formula:

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

0.30 = €55m ÷ (€320m - €135m) (Based on the trailing twelve months to June 2022).

Thus, H&K has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 8.7% earned by companies in a similar industry.

Check out our latest analysis for H&K

Historical performance is a great place to start when researching a stock so above you can see the gauge for H&K's ROCE against it's prior returns. If you'd like to look at how H&K has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From H&K's ROCE Trend?

There hasn't been much to report for H&K's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So it may not be a multi-bagger in the making, but given the decent 30% return on capital, it'd be difficult to find fault with the business's current operations.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 42% of total assets, this reported ROCE would probably be less than30% because total capital employed would be higher.The 30% ROCE could be even lower if current liabilities weren't 42% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

In Conclusion...

While H&K has impressive profitability from its capital, it isn't increasing that amount of capital. Since the stock has declined 33% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think H&K has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with H&K (including 1 which doesn't sit too well with us) .

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.