Did you know that there are financial metrics that can provide clues of a potential multi-bagger? A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. With this in mind, we have noticed some promising trends in Holmes Place International (TLV:HLMS) so let’s look a little deeper.
Return on capital employed (ROCE): what is it?
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 Holmes Place International, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.047 = ₪44m ÷ (₪1.1b – ₪187m) (Based on the last twelve months to March 2022).
So, Holmes Place International has a ROCE of 4.7%. In absolute terms, that’s a poor return, but it’s far better than the hotel industry average of 2.6%.
See our latest analysis for Holmes Place International
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to dive deep into the earnings, revenue and cash flow history of Holmes Place International, check out these free graphics here.
What can we say about the ROCE trend of Holmes Place International?
Even though ROCE is still weak in absolute terms, it is good to see that it is heading in the right direction. Over the past five years, return on capital employed has increased substantially to 4.7%. Basically, the business earns more per dollar of invested capital and on top of that, 376% more capital is also utilized now. Increasing returns on an increasing amount of capital are common among multi-baggers and that’s why we’re impressed.
One last thing to note, Holmes Place International has reduced current liabilities to 17% of total assets during this period, which effectively reduces the amount of financing from suppliers or short-term creditors. Therefore, we can be confident that the growth in ROCE is the result of fundamental company improvements, rather than a cooking class showcasing this company’s books.
The Key Takeaway
A business that increases its returns on capital and can constantly reinvest in itself is a highly sought after characteristic, and that is what Holmes Place International possesses. Given that the stock’s total return has been almost flat for the past three years, there could be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant further investigation of this stock.
One more thing: we have identified 3 warning signs with Holmes Place International (at least 2 of which we don’t like too much), and understanding them would certainly be helpful.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive 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 only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.