There has been no shortage of growth recently for Halma’s capital returns (LON:HLMA)

There are a few key trends to look out for if we want to identify the next multi-bagger. In a perfect world, we would like to see a company invest more capital in their business and ideally the returns from that capital also increase. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. So on that note, Halma (LON:HLMA) looks quite promising in terms of its capital return trends.

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. The formula for this calculation on Halma is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.16 = £278 million ÷ (£2.0 billion – £259 million) (Based on the last twelve months to September 2021).

Therefore, Halma has a ROCE of 16%. In absolute terms, that’s a decent return, but compared to the electronics industry average of 12%, it’s much better.

Check out our latest analysis for Halma

In the chart above, we measured Halma’s past ROCE against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.

What the ROCE trend can tell us

Investors would be happy with what is happening at Halma. Data shows that capital returns have increased significantly over the past five years to 16%. The amount of capital employed also increased by 44%. So we’re very inspired by what we’re seeing in Halma with its ability to reinvest capital profitably.

The essential

Overall, it’s great to see that Halma is reaping the rewards of past investments and increasing its capital base. And since the stock has performed exceptionally well over the past five years, these trends are taken into account by investors. So given that the stock has proven to have some promising trends, it’s worth researching the company further to see if those trends are likely to persist.

The story continues

Halma does have risks though, and we spotted 1 warning sign for Halma that might interest you.

Although Halma does not earn the highest yield, check out this free list of companies that achieve high returns on equity with strong balance sheets.

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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.