Yahoo Finance Returns On Capital At Headlam Group (LON:HEAD) Have Stalled
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Headlam Group (LON:HEAD) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Headlam Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = UK£37m ÷ (UK£435m - UK£168m) (Based on the trailing twelve months to December 2022).
Therefore, Headlam Group has an ROCE of 14%. By itself that's a normal return on capital and it's in line with the industry's average returns of 14%.
View our latest analysis for Headlam Group
Above you can see how the current ROCE for Headlam Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
Things have been pretty stable at Headlam Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Headlam Group to be a multi-bagger going forward. This probably explains why Headlam Group is paying out 53% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
The Bottom Line
In summary, Headlam Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 15% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Headlam Group has the makings of a multi-bagger.
One final note, you should learn about the 2 warning signs we've spotted with Headlam Group (including 1 which can't be ignored) .
While Headlam Group 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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