Returns On Capital At Hilton Metal Forging (NSE:HILTON) Paint An Interesting Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Hilton Metal Forging (NSE:HILTON) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Hilton Metal Forging:

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

0.063 = ₹50m ÷ (₹1.5b - ₹692m) (Based on the trailing twelve months to March 2020).

Thus, Hilton Metal Forging has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.7%.

See our latest analysis for Hilton Metal Forging

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Hilton Metal Forging, check out these free graphs here.

What Does the ROCE Trend For Hilton Metal Forging Tell Us?

Over the past five years, Hilton Metal Forging's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Hilton Metal Forging to be a multi-bagger going forward.

On a separate but related note, it's important to know that Hilton Metal Forging has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Hilton Metal Forging's ROCE

We can conclude that in regards to Hilton Metal Forging's returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 24% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 2 warning signs for Hilton Metal Forging that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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