Did you know that certain financial measures can provide clues about a potential multi-bagger? First, we would like to identify a growth return on capital employed (ROCE) and at the same time, a based capital employed. Basically, it means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. In light of this, when we looked at Hill & Smith Holdings (LON: HILS) and its ROCE trend, we weren’t exactly thrilled.
What is Return on Employee Capital (ROCE)?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on Hill & Smith Holdings is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.084 = £ 43million (£ 647million – £ 143million) (Based on the last twelve months up to December 2020).
Therefore, Hill & Smith Holdings has a ROCE of 8.4%. At the end of the day, that’s a low yield and it’s below the 14% average for the metals and mining industry.
Check out our latest analysis for Hill & Smith Holdings
In the chart above, we’ve measured Hill & Smith Holdings’ past ROCE against its past performance, but the future is arguably more important. If you are interested, you can view the analysts’ forecasts in our free analyst forecast report for the company.
What is the trend for returns?
On the surface, the ROCE trend at Hill & Smith Holdings does not inspire confidence. About five years ago, returns on capital were 11%, but since then they have fallen to 8.4%. Meanwhile, the company is using more capital, but it hasn’t changed much in terms of sales over the past 12 months, so it might reflect longer-term investments. It’s worth keeping an eye on the company’s profits from now on to see if those investments end up contributing to the bottom line.
Our opinion on Hill & Smith Holdings’ ROCE
In summary, while we are somewhat encouraged by Hill & Smith Holdings’ reinvestment in their own business, we are aware that returns are diminishing. Given that the stock has gained an impressive 80% over the past five years, investors must think there are better things to come. However, unless these underlying trends turn more positive, our hopes would not be too high.
One last thing to note, we have identified 3 warning signs with Hill & Smith Holdings and understanding them should be part of your investment process.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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