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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Hubbell (NYSE:HUBB), we don't think it's current trends fit the mold of a multi-bagger.
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 Hubbell is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$536m ÷ (US$5.3b - US$1.1b) (Based on the trailing twelve months to December 2021).
Therefore, Hubbell has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Electrical industry.
Above you can see how the current ROCE for Hubbell compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hubbell here for free.
So How Is Hubbell's ROCE Trending?
When we looked at the ROCE trend at Hubbell, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 13%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Hubbell's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Hubbell. And the stock has followed suit returning a meaningful 79% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
If you'd like to know about the risks facing Hubbell, we've discovered 2 warning signs that you should be aware of.
While Hubbell may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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.