The Returns At Samuel Heath & Sons (LON:HSM) Provide Us With Signs Of What's To Come

If you're looking for a multi-bagger, there's a few things to 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Samuel Heath & Sons (LON:HSM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.031 = UK£368k ÷ (UK£14m - UK£1.9m) (Based on the trailing twelve months to September 2020).

Therefore, Samuel Heath & Sons has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Building industry average of 5.3%.

See our latest analysis for Samuel Heath & Sons

Historical performance is a great place to start when researching a stock so above you can see the gauge for Samuel Heath & Sons' ROCE against it's prior returns. If you're interested in investigating Samuel Heath & Sons' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Samuel Heath & Sons' ROCE Trending?

When we looked at the ROCE trend at Samuel Heath & Sons, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.1% from 11% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Samuel Heath & Sons' ROCE

We're a bit apprehensive about Samuel Heath & Sons because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 37% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Samuel Heath & Sons (of which 1 is a bit concerning!) that you should 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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This article by Simply Wall St is general in nature. 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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