A Look Into James Halstead's (LON:JHD) Impressive Returns On Capital

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. That's why when we briefly looked at James Halstead's (LON:JHD) ROCE trend, we were very happy with what we saw.

Understanding 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. Analysts use this formula to calculate it for James Halstead:

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

0.29 = UK£50m ÷ (UK£227m - UK£56m) (Based on the trailing twelve months to December 2022).

So, James Halstead has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Building industry average of 15%.

View our latest analysis for James Halstead

Above you can see how the current ROCE for James Halstead compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering James Halstead here for free.

What Does the ROCE Trend For James Halstead Tell Us?

It's hard not to be impressed by James Halstead's returns on capital. The company has consistently earned 29% for the last five years, and the capital employed within the business has risen 27% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If James Halstead can keep this up, we'd be very optimistic about its future.

In Conclusion...

James Halstead has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. In light of this, the stock has only gained 23% over the last five years for shareholders who have owned the stock in this period. So to determine if James Halstead is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

One more thing: We've identified 2 warning signs with James Halstead (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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.