If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Hill International (NYSE:HIL) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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 Hill International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = US$12m ÷ (US$272m - US$85m) (Based on the trailing twelve months to December 2020).
Therefore, Hill International has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 10%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hill International's ROCE against it's prior returns. If you'd like to look at how Hill International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We're delighted to see that Hill International is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Hill International is using 34% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.
Our Take On Hill International's ROCE
In a nutshell, we're pleased to see that Hill International has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 28% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you'd like to know about the risks facing Hill International, we've discovered 1 warning sign 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.
This article by Simply Wall St is general in nature. 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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