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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Hammer Metals (ASX:HMX) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Hammer Metals is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = AU$6.8m ÷ (AU$37m - AU$770k) (Based on the trailing twelve months to June 2024).
Thus, Hammer Metals has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 10% generated by the Metals and Mining industry.
Check out our latest analysis for Hammer Metals
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hammer Metals' ROCE against it's prior returns. If you'd like to look at how Hammer Metals has performed in the past in other metrics, you can view this free graph of Hammer Metals' past earnings, revenue and cash flow.
The Trend Of ROCE
We're delighted to see that Hammer Metals is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 19% on its capital. And unsurprisingly, like most companies trying to break into the black, Hammer Metals is utilizing 159% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line
To the delight of most shareholders, Hammer Metals has now broken into profitability. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 5.9% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Hammer Metals does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...