Here's What To Make Of Spindex Industries' (SGX:564) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after briefly looking over the numbers, we don't think Spindex Industries (SGX:564) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Spindex Industries is:

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

0.11 = S$15m ÷ (S$167m - S$33m) (Based on the trailing twelve months to June 2020).

Therefore, Spindex Industries has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.3% it's much better.

See our latest analysis for Spindex Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Spindex Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Spindex Industries, check out these free graphs here.

What Can We Tell From Spindex Industries' ROCE Trend?

On the surface, the trend of ROCE at Spindex Industries doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Spindex Industries is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 76% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Spindex Industries does have some risks though, and we've spotted 2 warning signs for Spindex Industries that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

If you decide to trade Spindex Industries, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.