Investors Could Be Concerned With Brook Crompton Holdings' (SGX:AWC) 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? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. 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.

Understanding 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 Brook Crompton Holdings is:

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

0.077 = S$3.3m ÷ (S$65m - S$22m) (Based on the trailing twelve months to June 2022).

So, Brook Crompton Holdings has an ROCE of 7.7%. Even though it's in line with the industry average of 7.7%, it's still a low return by itself.

Check out the opportunities and risks within the SG Trade Distributors industry.

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 want to delve into the historical earnings, revenue and cash flow of Brook Crompton Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Brook Crompton Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.7% from 11% five years ago. 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.

The Key Takeaway

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. In light of this, the stock has only gained 8.2% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Brook Crompton Holdings does have some risks, we noticed 4 warning signs (and 2 which are significant) we think you should know about.

While Brook Crompton Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.