Returns On Capital Are Showing Encouraging Signs At Sin Heng Heavy Machinery (SGX:BKA)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Sin Heng Heavy Machinery (SGX:BKA) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Sin Heng Heavy Machinery:

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

0.038 = S$4.5m ÷ (S$124m - S$4.7m) (Based on the trailing twelve months to December 2021).

So, Sin Heng Heavy Machinery has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 6.9%.

View our latest analysis for Sin Heng Heavy Machinery

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

How Are Returns Trending?

While the ROCE is still rather low for Sin Heng Heavy Machinery, we're glad to see it heading in the right direction. The figures show that over the last five years, returns on capital have grown by 237%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 24% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 3.8%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Sin Heng Heavy Machinery's ROCE

From what we've seen above, Sin Heng Heavy Machinery has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a solid 74% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Sin Heng Heavy Machinery, we've discovered 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.