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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 HMS Hydraulic Machines & Systems Group (LON:HMSG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
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 HMS Hydraulic Machines & Systems Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = ₽3.7b ÷ (₽65b - ₽26b) (Based on the trailing twelve months to December 2021).
Therefore, HMS Hydraulic Machines & Systems Group has an ROCE of 9.7%. In absolute terms, that's a low return but it's around the Machinery industry average of 11%.
View our latest analysis for HMS Hydraulic Machines & Systems Group
In the above chart we have measured HMS Hydraulic Machines & Systems 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 report for HMS Hydraulic Machines & Systems Group.
What Does the ROCE Trend For HMS Hydraulic Machines & Systems Group Tell Us?
In terms of HMS Hydraulic Machines & Systems Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 15%, but since then they've fallen to 9.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a separate but related note, it's important to know that HMS Hydraulic Machines & Systems Group has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.