Returns Are Gaining Momentum At Hercules Hoists (NSE:HERCULES)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Hercules Hoists (NSE:HERCULES) looks quite promising in regards to its trends of return on capital.

Understanding 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. Analysts use this formula to calculate it for Hercules Hoists:

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

0.01 = ₹69m ÷ (₹6.8b - ₹147m) (Based on the trailing twelve months to December 2021).

Thus, Hercules Hoists has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 15%.

See our latest analysis for Hercules Hoists

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hercules Hoists' ROCE against it's prior returns. If you'd like to look at how Hercules Hoists has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Hercules Hoists Tell Us?

We're delighted to see that Hercules Hoists is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 1.0% on its capital. In addition to that, Hercules Hoists is employing 233% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 2.2%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

To the delight of most shareholders, Hercules Hoists has now broken into profitability. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 3.8% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing, we've spotted 2 warning signs facing Hercules Hoists that you might find interesting.

While Hercules Hoists 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.