If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 Hochschild Mining's (LON:HOC) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hochschild Mining, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = US$110m ÷ (US$1.4b - US$173m) (Based on the trailing twelve months to December 2020).
Therefore, Hochschild Mining has an ROCE of 9.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 14%.
Above you can see how the current ROCE for Hochschild Mining compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hochschild Mining.
How Are Returns Trending?
Shareholders will be relieved that Hochschild Mining has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 9.2% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.
The Key Takeaway
To sum it up, Hochschild Mining is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 39% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Hochschild Mining does have some risks though, and we've spotted 4 warning signs for Hochschild Mining that you might be interested in.
While Hochschild Mining 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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