Stock Analysis

Haleon (LON:HLN) Shareholders Will Want The ROCE Trajectory To Continue

LSE:HLN
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Haleon (LON:HLN) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Haleon:

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

0.086 = UK£2.5b ÷ (UK£34b - UK£5.0b) (Based on the trailing twelve months to June 2023).

So, Haleon has an ROCE of 8.6%. Even though it's in line with the industry average of 9.2%, it's still a low return by itself.

See our latest analysis for Haleon

roce
LSE:HLN Return on Capital Employed August 14th 2023

Above you can see how the current ROCE for Haleon compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Haleon Tell Us?

Haleon is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last three years, the ROCE has climbed 47% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Key Takeaway

To sum it up, Haleon is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 27% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Haleon does have some risks though, and we've spotted 2 warning signs for Haleon that you might be interested in.

While Haleon may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we're helping make it simple.

Find out whether Haleon is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.