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If you're looking for a multi-bagger, there's a few things to 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Hochschild Mining (LON:HOC) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Hochschild Mining:
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).
Therefore, Hochschild Mining has an ROCE of 9.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 13%.
View our latest analysis for Hochschild Mining
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 The Trend Of ROCE Can Tell Us
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. Since the stock has returned a staggering 144% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.