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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in H C Slingsby's (LON:SLNG) returns on capital, so let's have a look.
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. The formula for this calculation on H C Slingsby is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = UK£499k ÷ (UK£16m - UK£5.5m) (Based on the trailing twelve months to June 2023).
Therefore, H C Slingsby has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 14%.
Check out our latest analysis for H C Slingsby
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating H C Slingsby's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 297% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
Our Take On H C Slingsby's ROCE
To sum it up, H C Slingsby is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.
H C Slingsby does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.