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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Hillman Solutions (NASDAQ:HLMN) and its trend of ROCE, we really liked what we saw.
Understanding 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 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%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.5%.
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 to see what analysts are forecasting going forward, you should check out our free report for Hillman Solutions.
How Are Returns Trending?
While there are companies with higher returns on capital out there, we still find the trend at Hillman Solutions promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 145% over the last three years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
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. And since the stock has fallen 29% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing to note, we've identified 2 warning signs with Hillman Solutions and understanding these should be part of your investment process.
While Hillman Solutions isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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