Returns At Hor Kew (SGX:BBP) Are On The Way Up

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Hor Kew (SGX:BBP) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Hor Kew, this is the formula:

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

0.0031 = S$223k ÷ (S$167m - S$95m) (Based on the trailing twelve months to June 2023).

So, Hor Kew has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 3.8%.

Check out our latest analysis for Hor Kew

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

What Does the ROCE Trend For Hor Kew Tell Us?

We're delighted to see that Hor Kew is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 0.3% on their capital employed. Additionally, the business is utilizing 21% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

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. Effectively this means that suppliers or short-term creditors are now funding 57% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Hor Kew's ROCE

In summary, it's great to see that Hor Kew has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 10% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Hor Kew, we've spotted 4 warning signs, and 2 of them don't sit too well with us.

While Hor Kew 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.