Will Singsong Holdings' (KRX:006880) Growth In ROCE Persist?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Singsong Holdings' (KRX:006880) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 Singsong Holdings:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.054 = ₩7.2b ÷ (₩190b - ₩58b) (Based on the trailing twelve months to September 2020).

Therefore, Singsong Holdings has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.9%.

See our latest analysis for Singsong Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Singsong Holdings' ROCE against it's prior returns. If you're interested in investigating Singsong Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Singsong Holdings' ROCE Trend?

Singsong Holdings has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 68%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Singsong Holdings appears to been achieving more with less, since the business is using 34% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 31% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Singsong Holdings' ROCE

In a nutshell, we're pleased to see that Singsong Holdings has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 54% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Singsong Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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