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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, H C Slingsby (LON:SLNG) looks quite promising in regards to its trends of return on capital.
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. The formula for this calculation on H C Slingsby is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = UK£777k ÷ (UK£14m - UK£4.6m) (Based on the trailing twelve months to June 2021).
Therefore, H C Slingsby has an ROCE of 8.0%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 14%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for H C Slingsby's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of H C Slingsby, check out these free graphs here.
What Does the ROCE Trend For H C Slingsby Tell Us?
Shareholders will be relieved that H C Slingsby has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 8.0%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Key Takeaway
In summary, we're delighted to see that H C Slingsby has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if H C Slingsby can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing H C Slingsby we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.
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.
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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.