Here’s What’s Happening With Returns At Hexaom (EPA:HEXA)

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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, we've noticed some promising trends at Hexaom (EPA:HEXA) so let's look a bit deeper.

What is 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 Hexaom is:

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

0.088 = €24m ÷ (€642m - €371m) (Based on the trailing twelve months to June 2020).

Therefore, Hexaom has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Consumer Durables industry average of 7.9%.

Check out our latest analysis for Hexaom

In the above chart we have measured Hexaom's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hexaom.

The Trend Of ROCE

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 80% more capital is being employed now too. So we're very much inspired by what we're seeing at Hexaom thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Hexaom has a current liabilities to total assets ratio of 58%, which we'd consider pretty high. 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.

What We Can Learn From Hexaom's ROCE

In summary, it's great to see that Hexaom can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 10% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a separate note, we've found 2 warning signs for Hexaom you'll probably want to know about.

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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