Be Wary Of Hampiðjan hf (ICE:HAMP) And Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Hampiðjan hf (ICE:HAMP), it didn't seem to tick all of these boxes.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hampiðjan hf, this is the formula:

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

0.062 = €26m ÷ (€552m - €138m) (Based on the trailing twelve months to March 2025).

Therefore, Hampiðjan hf has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.8%.

Check out our latest analysis for Hampiðjan hf

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

What Can We Tell From Hampiðjan hf's ROCE Trend?

On the surface, the trend of ROCE at Hampiðjan hf doesn't inspire confidence. Around five years ago the returns on capital were 9.9%, but since then they've fallen to 6.2%. However it looks like Hampiðjan hf might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Hampiðjan hf is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 97% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 2 warning signs with Hampiðjan hf and understanding them should be part of your investment process.

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.