Capital Investments At James Halstead (LON:JHD) Point To A Promising Future
What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That’s why when we briefly looked at James Halstead’s (LON:JHD) ROCE trend, we were very happy with what we saw.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.31 = UK£55m ÷ (UK£229m – UK£52m) (Based on the trailing twelve months to December 2023).
So, James Halstead has an ROCE of 31%. In absolute terms that’s a great return and it’s even better than the Building industry average of 9.8%.
See 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’re interested, you can view the analysts predictions in our free analyst report for James Halstead .
The Trend Of ROCE
James Halstead deserves to be commended in regards to it’s returns. Over the past five years, ROCE has remained relatively flat at around 31% and the business has deployed 23% more capital into its operations. With returns that high, it’s great that the business can continually reinvest its money at such appealing rates of return. You’ll see this when looking at well operated businesses or favorable business models.
In Conclusion…
In the end, the company has proven it can reinvest it’s capital at high rates of returns, which you’ll remember is a trait of a multi-bagger. However, over the last five years, the stock hasn’t provided much growth to shareholders in the way of total returns. For that reason, savvy investors might want to look further into this company in case it’s a prime investment.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation for JHD on our platform that is definitely worth checking out.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
