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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Hyster-Yale Materials Handling (NYSE:HY) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Hyster-Yale Materials Handling, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$176m ÷ (US$2.1b - US$1.3b) (Based on the trailing twelve months to September 2023).
Thus, Hyster-Yale Materials Handling has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Machinery industry average of 12%.
View our latest analysis for Hyster-Yale Materials Handling
In the above chart we have measured Hyster-Yale Materials Handling'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 report on analyst forecasts for the company.
What Can We Tell From Hyster-Yale Materials Handling's ROCE Trend?
Hyster-Yale Materials Handling has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 258%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 23% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 63% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
The Key Takeaway
In the end, Hyster-Yale Materials Handling has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.
Hyster-Yale Materials Handling does have some risks though, and we've spotted 1 warning sign for Hyster-Yale Materials Handling that you might be interested in.
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.