Here's What To Make Of Halma's (LON:HLMA) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, the ROCE of Halma (LON:HLMA) looks decent, right now, so lets see what the trend of returns can tell us.

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. The formula for this calculation on Halma is:

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

0.14 = UK£344m ÷ (UK£2.8b - UK£324m) (Based on the trailing twelve months to September 2023).

Therefore, Halma has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Electronic industry.

Check out our latest analysis for Halma

Above you can see how the current ROCE for Halma 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 Halma for free.

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. The company has employed 93% more capital in the last five years, and the returns on that capital have remained stable at 14%. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Halma's ROCE

The main thing to remember is that Halma has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 28% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Halma is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Halma could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for HLMA on our platform quite valuable.

While Halma 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.

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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.