The Return Trends At Hill & Smith (LON:HILS) Look Promising

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Hill & Smith (LON:HILS) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 Hill & Smith is:

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

0.18 = UK£103m ÷ (UK£720m - UK£146m) (Based on the trailing twelve months to June 2023).

Therefore, Hill & Smith has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Metals and Mining industry.

See our latest analysis for Hill & Smith

Above you can see how the current ROCE for Hill & Smith compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hill & Smith here for free.

What Does the ROCE Trend For Hill & Smith Tell Us?

Hill & Smith's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 25% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Hill & Smith's ROCE

To sum it up, Hill & Smith is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 85% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

While Hill & Smith looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether HILS is currently trading for a fair price.

While Hill & Smith 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. 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.