In This Article:
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Looking at Hamilton Beach Brands Holding (NYSE:HBB), it does have a high ROCE right now, but lets see how returns are trending.
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 Hamilton Beach Brands Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$46m ÷ (US$409m - US$213m) (Based on the trailing twelve months to September 2024).
Therefore, Hamilton Beach Brands Holding has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 15%.
Check out our latest analysis for Hamilton Beach Brands Holding
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 Hamilton Beach Brands Holding's past further, check out this free graph covering Hamilton Beach Brands Holding's past earnings, revenue and cash flow.
So How Is Hamilton Beach Brands Holding's ROCE Trending?
In terms of Hamilton Beach Brands Holding's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 34%. However it looks like Hamilton Beach Brands Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Hamilton Beach Brands Holding has done well to pay down its current liabilities to 52% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.