Capital Investment Trends At HEXPOL (STO:HPOL B) Look Strong

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over HEXPOL's (STO:HPOL B) trend of ROCE, we really liked what we saw.

What Is 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. To calculate this metric for HEXPOL, this is the formula:

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

0.20 = kr3.3b ÷ (kr24b - kr6.7b) (Based on the trailing twelve months to December 2022).

Therefore, HEXPOL has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 5.0%.

Check out our latest analysis for HEXPOL

In the above chart we have measured HEXPOL's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering HEXPOL here for free.

How Are Returns Trending?

HEXPOL deserves to be commended in regards to it's returns. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 106% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If HEXPOL can keep this up, we'd be very optimistic about its future.

The Bottom Line On HEXPOL's ROCE

In short, we'd argue HEXPOL has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has followed suit returning a meaningful 72% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

While HEXPOL looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether HPOL B is currently trading for a fair price.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.