Spindex Industries (SGX:564) Will Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Spindex Industries (SGX:564), it didn't seem to tick all of these boxes.

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. To calculate this metric for Spindex Industries, this is the formula:

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

0.13 = S$19m ÷ (S$198m - S$54m) (Based on the trailing twelve months to December 2020).

So, Spindex Industries has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 6.2% generated by the Machinery industry.

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're interested in investigating Spindex Industries' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Spindex Industries' ROCE Trending?

On the surface, the trend of ROCE at Spindex Industries doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 13%. However it looks like Spindex Industries might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Spindex Industries' ROCE

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 84% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Spindex Industries that we think you should be aware of.

While Spindex Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.
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