If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. First, we would like to identify a growth to recover on capital employed (ROCE) and at the same time, a based capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. Ergo, when we looked at the trends in ROCE at Hermès International Société en commandite par actions (EPA: RMS), we liked what we saw.
What is Return on Employee Capital (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Hermès International Société en commandite par actions, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.33 = € 3.3bn ÷ (€ 12bn – € 2.1bn) (Based on the last twelve months up to June 2021).
Therefore, Hermès International Société en commandite par actions posted a ROCE of 33%. It’s a fantastic return and not only that, it exceeds the 16% average earned by companies in a similar industry.
See our latest analysis for Hermès International Société en commandite par actions
In the graph above, we have measured the past ROCE of Hermès International Société en commandite par actions compared to its past performance, but the future is arguably more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What the ROCE trend can tell us
It’s hard not to be impressed by the profitability of the capital of Hermès International Société en commandite par actions. The company has employed 136% more capital over the past five years, and returns on that capital have remained stable at 33%. Now that the ROCE is attractive at 33%, this combination is actually quite attractive because it means that the company can constantly put money to work and generate those high returns. You’ll see this by looking at well-run businesses or favorable business models.
The Bottom Line On Hermès International Société en commandite par actions’ ROCE
In the end, the company has proven that it can reinvest its capital at high rates of return, which you will recall is a hallmark of a multi-bagger. And long-term investors would be delighted with the 234% return they’ve received over the past five years. So while the stock may be “more expensive” than it used to be, we believe that the solid fundamentals justify this stock for further research.
Before drawing any conclusions, we need to know what value we are getting for the current stock price. This is where you can consult our FREE estimate of intrinsic value which compares the stock price and the estimated value.
If you want to look for other stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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