Hammond Power Solutions (TSE:HPS.A) Has More To Do To Multiply In Value Going Forward

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at Hammond Power Solutions (TSE:HPS.A) and its ROCE trend, we weren't exactly thrilled.

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 Hammond Power Solutions:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.10 = CA$12m ÷ (CA$192m - CA$70m) (Based on the trailing twelve months to March 2021).

Thus, Hammond Power Solutions has an ROCE of 10.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.8%.

See our latest analysis for Hammond Power Solutions

roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hammond Power Solutions' ROCE against it's prior returns. If you're interested in investigating Hammond Power Solutions' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Hammond Power Solutions' ROCE Trend?

There hasn't been much to report for Hammond Power Solutions' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Hammond Power Solutions in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Key Takeaway

In a nutshell, Hammond Power Solutions has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 89% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Hammond Power Solutions does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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