Why You Should Care About HEXPOL's (STO:HPOL B) Strong Returns On Capital

There are a few key trends to look for if we want to identify the next 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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.

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. The formula for this calculation on HEXPOL is:

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

0.20 = kr3.6b ÷ (kr25b - kr6.9b) (Based on the trailing twelve months to June 2023).

So, 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 12%.

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 to see what analysts are forecasting going forward, you should check out our free report for HEXPOL.

What Can We Tell From HEXPOL's ROCE Trend?

It's hard not to be impressed by HEXPOL's returns on capital. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 95% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If HEXPOL can keep this up, we'd be very optimistic about its future.

Our Take On HEXPOL's ROCE

HEXPOL has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And given the stock has only risen 27% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.