What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in Hornby's (LON:HRN) returns on capital, so let's have a look.
What is 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 Hornby is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.005 = UK£206k ÷ (UK£51m - UK£9.8m) (Based on the trailing twelve months to September 2021).
Thus, Hornby has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Leisure industry average of 22%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hornby's ROCE against it's prior returns. If you're interested in investigating Hornby's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Hornby Tell Us?
Hornby has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 0.5% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
The Key Takeaway
To bring it all together, Hornby has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 53% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing, we've spotted 1 warning sign facing Hornby that you might find interesting.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.
Hornby PLC, through its subsidiaries, engages in the design, development, sourcing, and distribution of hobby and interactive products in the United Kingdom, the United State, Spain, Italy, and rest of Europe.
Adequate balance sheet and slightly overvalued.