If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at Hor Kew (SGX:BBP) and its trend of ROCE, we really liked what we saw.
Understanding 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. Analysts use this formula to calculate it for Hor Kew:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = S$2.6m ÷ (S$163m - S$72m) (Based on the trailing twelve months to June 2020).
So, Hor Kew has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 4.3%.
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?
Shareholders will be relieved that Hor Kew has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.9% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.Another thing to note, Hor Kew has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
To sum it up, Hor Kew is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 48% 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.
Like most companies, Hor Kew does come with some risks, and we've found 3 warning signs that you should be aware of.
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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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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