The Returns On Capital At Hamilton Beach Brands Holding (NYSE:HBB) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Hamilton Beach Brands Holding (NYSE:HBB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hamilton Beach Brands Holding:

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

0.10 = US$29m ÷ (US$389m - US$102m) (Based on the trailing twelve months to December 2022).

Thus, Hamilton Beach Brands Holding has an ROCE of 10%. In isolation, that's a pretty standard return but against the Consumer Durables industry average of 17%, it's not as good.

View our latest analysis for Hamilton Beach Brands Holding

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Hamilton Beach Brands Holding, check out these free graphs here.

What Does the ROCE Trend For Hamilton Beach Brands Holding Tell Us?

In terms of Hamilton Beach Brands Holding's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 43% 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.

On a side note, Hamilton Beach Brands Holding has done well to pay down its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Hamilton Beach Brands Holding's ROCE

Bringing it all together, while we're somewhat encouraged by Hamilton Beach Brands Holding's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 48% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Hamilton Beach Brands Holding does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

What are the risks and opportunities for Hamilton Beach Brands Holding?

NYSE:HBB

Hamilton Beach Brands Holding

Hamilton Beach Brands Holding Company, together with its subsidiaries, designs, markets, and distributes small electric household and specialty housewares appliances in the United States and internationally.Show more

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Rewards

• Price-To-Earnings ratio (5.4x) is below the US market (13.9x)

• Earnings have grown 8.7% per year over the past 5 years

Risks

• Debt is not well covered by operating cash flow

• Large one-off items impacting financial results

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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.