Hammer Metals (ASX:HMX) Is Looking To Continue Growing Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Speaking of which, we noticed some great changes in Hammer Metals' (ASX:HMX) returns on capital, so let's have a look.

What Is 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. The formula for this calculation on Hammer Metals is:

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

0.19 = AU$6.8m ÷ (AU$37m - AU$770k) (Based on the trailing twelve months to June 2024).

Therefore, Hammer Metals has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 10% generated by the Metals and Mining industry.

Check out our latest analysis for Hammer Metals

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're interested in investigating Hammer Metals' past further, check out this free graph covering Hammer Metals' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The fact that Hammer Metals is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 19% on its capital. In addition to that, Hammer Metals is employing 159% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Our Take On Hammer Metals' ROCE

To the delight of most shareholders, Hammer Metals has now broken into profitability. Since the stock has only returned 5.9% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Hammer Metals does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While Hammer Metals isn't earning the highest return, check out this free list of companies that are 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.