If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. That’s why when we briefly looked at H&R Block’s ROCE trend, we were very happy with what we saw.
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on H&R Block is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.31 = US$770m ÷ (US$3.7b – US$1.2b) (Based on the trailing twelve months to April 2021).
So, H&R Block has an ROCE of 31%. That’s a fantastic return and not only that, it outpaces the average of 8.0% earned by companies in a similar industry.
What Can We Tell From H&R Block’s ROCE Trend?
It’s hard not to be impressed by H&R Block’s returns on capital. Over the past five years, ROCE has remained relatively flat at around 31% and the business has deployed 38% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that’s even better. If these trends can continue, it wouldn’t surprise us if the company became a multi-bagger.
The Bottom Line
In the end, the company has proven it can reinvest it’s capital at high rates of returns, which you’ll remember is a trait of a multi-bagger. In light of this, the stock has only gained 29% over the last five years for shareholders who have owned the stock in this period. So because of the trends we’re seeing, we’d recommend looking further into this stock to see if it has the makings of a multi-bagger.
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