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To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 the ROCE trend of Hill & Smith (LON:HILS) 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 Hill & Smith is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = UK£133m ÷ (UK£796m - UK£158m) (Based on the trailing twelve months to December 2024).
Thus, Hill & Smith has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 7.0% earned by companies in a similar industry.
Check out our latest analysis for Hill & Smith
Above you can see how the current ROCE for Hill & Smith compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hill & Smith .
What Does the ROCE Trend For Hill & Smith Tell Us?
Hill & Smith's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 50% whilst employing roughly the same amount of capital. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line
To bring it all together, Hill & Smith has done well to increase the returns it's generating from its capital employed. And with a respectable 71% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Hill & Smith can keep these trends up, it could have a bright future ahead.