Stock Analysis

Returns On Capital - An Important Metric For Hochschild Mining (LON:HOC)

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LSE:HOC
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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. 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)?

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 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).

Thus, Hochschild Mining has an ROCE of 9.2%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 14%.

See our latest analysis for Hochschild Mining

roce
LSE:HOC Return on Capital Employed March 21st 2021

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'd like to see what analysts are forecasting going forward, you should check out our free report for Hochschild Mining.

What Can We Tell From Hochschild Mining's ROCE Trend?

We're delighted to see that Hochschild Mining is reaping rewards from its investments and has now broken into profitability. The company now earns 9.2% on its capital, because five years ago it was incurring losses. 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.

What We Can Learn From Hochschild Mining's ROCE

In summary, we're delighted to see that Hochschild Mining has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 152% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

On a separate note, we've found 4 warning signs for Hochschild Mining you'll probably want to know about.

While Hochschild Mining 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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