Yahoo Finance Will Hamilton Thorne (CVE:HTL) Multiply In Value Going Forward?
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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Hamilton Thorne (CVE:HTL) 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 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. Analysts use this formula to calculate it for Hamilton Thorne:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = US$2.7m ÷ (US$64m - US$8.8m) (Based on the trailing twelve months to June 2020).
Therefore, Hamilton Thorne has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.0%.
Check out our latest analysis for Hamilton Thorne
Above you can see how the current ROCE for Hamilton Thorne compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hamilton Thorne here for free.
What Does the ROCE Trend For Hamilton Thorne Tell Us?
Unfortunately, the trend isn't great with ROCE falling from 33% five years ago, while capital employed has grown 1,345%. Usually this isn't ideal, but given Hamilton Thorne conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Hamilton Thorne's earnings and if they change as a result from the capital raise.
On a side note, Hamilton Thorne has done well to pay down its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From Hamilton Thorne's ROCE
While returns have fallen for Hamilton Thorne in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 440% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
One more thing, we've spotted 3 warning signs facing Hamilton Thorne that you might find interesting.
While Hamilton Thorne may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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