If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That’s why when we briefly looked at Helen of Troy’s (NASDAQ:HELE) ROCE trend, we were pretty happy with what we saw.
Understanding Return On Capital Employed (ROCE)
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 Helen of Troy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = US$275m ÷ (US$2.8b – US$603m) (Based on the trailing twelve months to February 2022).
Therefore, Helen of Troy has an ROCE of 12%. In isolation, that’s a pretty standard return but against the Consumer Durables industry average of 16%, it’s not as good.
Check out our latest analysis for Helen of Troy
Above you can see how the current ROCE for Helen of Troy compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Helen of Troy.
What Can We Tell From Helen of Troy’s ROCE Trend?
While the current returns on capital are decent, they haven’t changed much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 46% more capital into its operations. Since 12% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Our Take On Helen of Troy’s ROCE
The main thing to remember is that Helen of Troy has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 63% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing: We’ve identified 3 warning signs with Helen of Troy (at least 1 which is concerning) , and understanding them would certainly be useful.
While Helen of Troy isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.