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. So on that note, Hochschild Mining (LON:HOC) looks quite promising in regards to its trends of return on capital.
What is 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. Analysts use this formula to calculate it for Hochschild Mining:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$210m ÷ (US$1.4b - US$195m) (Based on the trailing twelve months to June 2021).
Therefore, Hochschild Mining has an ROCE of 18%. By itself that's a normal return on capital and it's in line with the industry's average returns of 18%.
In the above chart we have measured Hochschild Mining's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Hochschild Mining's ROCE Trend?
Hochschild Mining is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 170% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Key Takeaway
To bring it all together, Hochschild Mining has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 34% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
If you'd like to know about the risks facing Hochschild Mining, we've discovered 2 warning signs that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
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