Hubbell (NYSE:HUBB) Will Be Hoping To Turn Its Returns On Capital Around

By
Simply Wall St
Published
December 30, 2021
NYSE:HUBB
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Having said that, from a first glance at Hubbell (NYSE:HUBB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hubbell, this is the formula:

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

0.13 = US$564m ÷ (US$5.2b - US$1.0b) (Based on the trailing twelve months to September 2021).

So, Hubbell has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 9.3% it's much better.

View our latest analysis for Hubbell

roce
NYSE:HUBB Return on Capital Employed December 30th 2021

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.

What Does the ROCE Trend For Hubbell Tell Us?

On the surface, the trend of ROCE at Hubbell doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Hubbell's ROCE

To conclude, we've found that Hubbell is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 101% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 1 warning sign for Hubbell you'll probably want to know about.

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

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