Slowing Rates Of Return At Hor Kew (SGX:BBP) Leave Little Room For Excitement

By
Simply Wall St
Published
April 22, 2022
SGX:BBP
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Hor Kew (SGX:BBP), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.0083 = S$833k ÷ (S$157m - S$57m) (Based on the trailing twelve months to December 2021).

So, Hor Kew has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 2.0%.

See our latest analysis for Hor Kew

roce
SGX:BBP Return on Capital Employed April 22nd 2022

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'd like to look at how Hor Kew has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 21% in that same period. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 0.8%, it's hard to get excited about these developments.

What We Can Learn From Hor Kew's ROCE

Overall, we're not ecstatic to see Hor Kew reducing the amount of capital it employs in the business. And in the last five years, the stock has given away 28% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Hor Kew (including 2 which don't sit too well with us) .

While Hor Kew 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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