Will the Promising Trends At Tiong Seng Holdings (SGX:BFI) Continue?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at Tiong Seng Holdings (SGX:BFI) and its trend of ROCE, we really liked what we saw.

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 Tiong Seng Holdings, this is the formula:

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

0.0037 = S$1.2m ÷ (S$599m - S$284m) (Based on the trailing twelve months to June 2020).

Therefore, Tiong Seng Holdings has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 1.9%.

Check out our latest analysis for Tiong Seng Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tiong Seng Holdings' ROCE against it's prior returns. If you'd like to look at how Tiong Seng Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Tiong Seng Holdings Tell Us?

We're delighted to see that Tiong Seng Holdings 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 0.4% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 39%. This could potentially mean that the company is selling some of its assets.

Another thing to note, Tiong Seng Holdings has a high ratio of current liabilities to total assets of 47%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Tiong Seng Holdings' ROCE

In summary, it's great to see that Tiong Seng Holdings has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 13% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing Tiong Seng Holdings, we've discovered 3 warning signs that you should be aware of.

While Tiong Seng 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.

If you’re looking to trade Tiong Seng Holdings, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.