Yahoo Finance There Are Reasons To Feel Uneasy About HMS Hydraulic Machines & Systems Group's (LON:HMSG) Returns On Capital
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.
The Key Takeaway
While returns have fallen for HMS Hydraulic Machines & Systems Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 39% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
HMS Hydraulic Machines & Systems Group does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those can't be ignored...
While HMS Hydraulic Machines & Systems Group 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.
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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.
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