If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Hamilton Thorne (CVE:HTL), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Hamilton Thorne:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = US$3.3m ÷ (US$70m - US$9.3m) (Based on the trailing twelve months to June 2022).
Thus, Hamilton Thorne has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.2%.
See our latest analysis for Hamilton Thorne
In the above chart we have measured Hamilton Thorne's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
On the surface, the trend of ROCE at Hamilton Thorne doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 5.5%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Hamilton Thorne'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 Hamilton Thorne. And long term investors must be optimistic going forward because the stock has returned a huge 116% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you want to continue researching Hamilton Thorne, you might be interested to know about the 3 warning signs that our analysis has discovered.
While Hamilton Thorne 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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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.
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