Here's What's Concerning About Brook Crompton Holdings' (SGX:AWC) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Brook Crompton Holdings (SGX:AWC) 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)?

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 Brook Crompton Holdings is:

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

0.081 = S$3.3m ÷ (S$60m - S$19m) (Based on the trailing twelve months to December 2022).

Thus, Brook Crompton Holdings has an ROCE of 8.1%. On its own, that's a low figure but it's around the 9.5% average generated by the Trade Distributors industry.

Check out our latest analysis for Brook Crompton Holdings

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

SWOT Analysis for Brook Crompton Holdings

How Are Returns Trending?

When we looked at the ROCE trend at Brook Crompton Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Brook Crompton Holdings. However, despite the promising trends, the stock has fallen 15% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Brook Crompton Holdings does come with some risks though, we found 6 warning signs in our investment analysis, and 2 of those are concerning...

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.