Yahoo Finance Hamilton Thorne (TSE:HTL) Could Be Struggling To Allocate Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Although, when we looked at Hamilton Thorne (TSE:HTL), it didn't seem to tick all of these boxes.
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 Hamilton Thorne:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = US$1.5m ÷ (US$91m - US$14m) (Based on the trailing twelve months to September 2023).
Therefore, Hamilton Thorne has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 9.3%.
View our latest analysis for Hamilton Thorne
In the above chart we have measured Hamilton Thorne'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 Hamilton Thorne.
What Does the ROCE Trend For Hamilton Thorne Tell Us?
In terms of Hamilton Thorne's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.3%, but since then they've fallen to 1.9%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Hamilton Thorne's ROCE
While returns have fallen for Hamilton Thorne in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 30% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
Hamilton Thorne does have some risks though, and we've spotted 1 warning sign for Hamilton Thorne that you might be interested in.
While Hamilton Thorne 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.
