Stock Analysis

Holland Colours (AMS:HOLCO) Has More To Do To Multiply In Value Going Forward

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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Holland Colours' (AMS:HOLCO) trend of ROCE, we 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 Holland Colours:

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

0.18 = €11m ÷ (€79m - €17m) (Based on the trailing twelve months to September 2022).

Thus, Holland Colours has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 13% it's much better.

View our latest analysis for Holland Colours

ENXTAM:HOLCO Return on Capital Employed February 4th 2023

Historical performance is a great place to start when researching a stock so above you can see the gauge for Holland Colours' ROCE against it's prior returns. If you're interested in investigating Holland Colours' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Holland Colours' ROCE Trend?

While the current returns on capital are decent, they haven't changed much. The company has employed 73% more capital in the last five years, and the returns on that capital have remained stable at 18%. 18% is a pretty standard return, and it provides some comfort knowing that Holland Colours has consistently earned this amount. 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.

Our Take On Holland Colours' ROCE

The main thing to remember is that Holland Colours has proven its ability to continually reinvest at respectable rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

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

While Holland Colours isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

Find out whether Holland Colours 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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