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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Looking at James Halstead (LON:JHD), it does have a high ROCE right now, but lets see how returns are trending.
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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 James Halstead:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = UK£55m ÷ (UK£234m - UK£53m) (Based on the trailing twelve months to December 2024).
Therefore, James Halstead has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
View our latest analysis for James Halstead
In the above chart we have measured James Halstead'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 James Halstead .
What Does the ROCE Trend For James Halstead Tell Us?
There hasn't been much to report for James Halstead's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward. On top of that you'll notice that James Halstead has been paying out a large portion (85%) of earnings in the form of dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.
The Bottom Line
Although is allocating it's capital efficiently to generate impressive returns, it isn't compounding its base of capital, which is what we'd see from a multi-bagger. Since the stock has declined 25% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think James Halstead has the makings of a multi-bagger.