HEXPOL (STO:HPOL B) Might Become A Compounding Machine

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. 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 HEXPOL (STO:HPOL B) looks attractive right now, so lets see what the trend of returns can tell us.

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. The formula for this calculation on HEXPOL is:

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

0.21 = kr3.6b ÷ (kr24b - kr6.5b) (Based on the trailing twelve months to September 2023).

Thus, HEXPOL has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

See our latest analysis for HEXPOL

Above you can see how the current ROCE for HEXPOL compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

It's hard not to be impressed by HEXPOL's returns on capital. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 74% 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.

Our Take 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 long term investors would be thrilled with the 106% return they've received 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.

HEXPOL is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.