Investors Shouldn't Overlook The Favourable Returns On Capital At Hermès International Société en commandite par actions (EPA:RMS)

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Hermès International Société en commandite par actions (EPA:RMS) looks attractive right now, so lets see what the trend of returns can tell us.

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 Hermès International Société en commandite par actions, this is the formula:

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

0.35 = €6.0b ÷ (€21b - €3.3b) (Based on the trailing twelve months to June 2024).

Thus, Hermès International Société en commandite par actions has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

See our latest analysis for Hermès International Société en commandite par actions

In the above chart we have measured Hermès International Société en commandite par actions' 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 analyst report for Hermès International Société en commandite par actions .

What The Trend Of ROCE Can Tell Us

In terms of Hermès International Société en commandite par actions' history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 35% and the business has deployed 147% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Key Takeaway

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has done incredibly well with a 249% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

While Hermès International Société en commandite par actions looks impressive, no company is worth an infinite price. The intrinsic value infographic for RMS helps visualize whether it is currently trading for a fair price.

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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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.