Why You Should Care About Hermès International Société en commandite par actions' (EPA:RMS) Strong Returns On Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Hermès International Société en commandite par actions is:

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

0.34 = €4.2b ÷ (€15b - €2.7b) (Based on the trailing twelve months to June 2022).

Thus, Hermès International Société en commandite par actions has an ROCE of 34%. That's a fantastic return and not only that, it outpaces the average of 20% earned by companies in a similar industry.

Check out 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 report for Hermès International Société en commandite par actions.

What Does the ROCE Trend For Hermès International Société en commandite par actions Tell Us?

We'd be pretty happy with returns on capital like Hermès International Société en commandite par actions. The company has employed 150% more capital in the last five years, and the returns on that capital have remained stable at 34%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Hermès International Société en commandite par actions can keep this up, we'd be very optimistic about its future.

The Bottom Line

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 long term investors would be thrilled with the 257% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

Hermès International Société en commandite par actions is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.