Hillman Solutions (NASDAQ:HLMN) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. With that in mind, we've noticed some promising trends at Hillman Solutions (NASDAQ:HLMN) so let's look a bit deeper.

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 Hillman Solutions, this is the formula:

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

0.029 = US$68m ÷ (US$2.6b - US$283m) (Based on the trailing twelve months to June 2022).

Thus, Hillman Solutions has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 10%.

Our analysis indicates that HLMN is potentially undervalued!

Above you can see how the current ROCE for Hillman Solutions 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 Hillman Solutions here for free.

The Trend Of ROCE

While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. The figures show that over the last three years, ROCE has grown 145% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Hillman Solutions' ROCE

To sum it up, Hillman Solutions is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 31% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Hillman Solutions, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Hillman Solutions 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.