There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Hornby (LON:HRN) so let's look a bit deeper.
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 Hornby:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.005 = UK£206k ÷ (UK£51m - UK£9.8m) (Based on the trailing twelve months to September 2021).
Therefore, Hornby has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 22%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hornby's ROCE against it's prior returns. If you'd like to look at how Hornby has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Hornby's ROCE Trend?
We're delighted to see that Hornby is reaping rewards from its investments and has now 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 0.5%, 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. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.
The Bottom Line On Hornby's ROCE
To sum it up, Hornby is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 59% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. 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 Hornby, we've discovered 2 warning signs that you should be aware of.
While Hornby 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.