Should You Be Impressed By Hill & Smith Holdings' (LON:HILS) Returns on Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Although, when we looked at Hill & Smith Holdings (LON:HILS), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Hill & Smith Holdings, this is the formula:

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

0.098 = UK£56m ÷ (UK£701m - UK£134m) (Based on the trailing twelve months to June 2020).

Thus, Hill & Smith Holdings has an ROCE of 9.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 12%.

See our latest analysis for Hill & Smith Holdings

In the above chart we have measured Hill & Smith Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hill & Smith Holdings.

So How Is Hill & Smith Holdings' ROCE Trending?

The returns on capital haven't changed much for Hill & Smith Holdings in recent years. The company has employed 92% more capital in the last five years, and the returns on that capital have remained stable at 9.8%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Hill & Smith Holdings' ROCE

As we've seen above, Hill & Smith Holdings' returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 82% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Hill & Smith Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Hill & Smith Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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