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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Howden Joinery Group (LON:HWDN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Howden Joinery Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = UK£339m ÷ (UK£2.2b - UK£484m) (Based on the trailing twelve months to December 2024).
Therefore, Howden Joinery Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 14% generated by the Trade Distributors industry.
View our latest analysis for Howden Joinery Group
In the above chart we have measured Howden Joinery Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Howden Joinery Group .
What Can We Tell From Howden Joinery Group's ROCE Trend?
On the surface, the trend of ROCE at Howden Joinery Group doesn't inspire confidence. Around five years ago the returns on capital were 38%, but since then they've fallen to 19%. However it looks like Howden Joinery Group 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.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Howden Joinery Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 52% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.