Samuel Heath & Sons (LON:HSM) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Samuel Heath & Sons (LON:HSM), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Samuel Heath & Sons is:

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

0.082 = UK£1.1m ÷ (UK£15m - UK£2.1m) (Based on the trailing twelve months to September 2021).

So, Samuel Heath & Sons has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Building industry average of 13%.

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 want to delve into the historical earnings, revenue and cash flow of Samuel Heath & Sons, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Samuel Heath & Sons, we didn't gain much confidence. To be more specific, ROCE has fallen from 12% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Samuel Heath & Sons' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Samuel Heath & Sons is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 126% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know more about Samuel Heath & Sons, we've spotted 4 warning signs, and 2 of them are potentially serious.

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.

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.

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