Yahoo Finance Hammond Power Solutions (TSE:HPS.A) Could Become A Multi-Bagger
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Hammond Power Solutions (TSE:HPS.A) we really liked what we saw.
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. To calculate this metric for Hammond Power Solutions, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.37 = CA$84m ÷ (CA$374m - CA$148m) (Based on the trailing twelve months to September 2023).
Therefore, Hammond Power Solutions has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Electrical industry average of 14%.
View our latest analysis for Hammond Power Solutions
Above you can see how the current ROCE for Hammond Power Solutions 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 Hammond Power Solutions for free.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Hammond Power Solutions. The data shows that returns on capital have increased substantially over the last five years to 37%. Basically the business is earning more per dollar of capital invested and in addition to that, 87% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
Our Take On Hammond Power Solutions' ROCE
All in all, it's terrific to see that Hammond Power Solutions is reaping the rewards from prior investments and is growing its capital base. And a remarkable 1,745% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you'd like to know about the risks facing Hammond Power Solutions, we've discovered 1 warning sign that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
