Samuel Heath & Sons (LON:HSM) Has More To Do To Multiply In Value Going Forward

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Having said that, from a first glance at Samuel Heath & Sons (LON:HSM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Samuel Heath & Sons, this is the formula:

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

0.066 = UK£821k ÷ (UK£14m - UK£1.8m) (Based on the trailing twelve months to September 2023).

Therefore, Samuel Heath & Sons has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Building industry average of 11%.

View our latest analysis for Samuel Heath & Sons

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Samuel Heath & Sons' past further, check out this free graph covering Samuel Heath & Sons' past earnings, revenue and cash flow.

So How Is Samuel Heath & Sons' ROCE Trending?

Over the past five years, Samuel Heath & Sons' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Samuel Heath & Sons in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

What We Can Learn From Samuel Heath & Sons' ROCE

In summary, Samuel Heath & Sons isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 22% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 5 warning signs we've spotted with Samuel Heath & Sons (including 1 which is concerning) .

While Samuel Heath & Sons 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. 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.