Stock Analysis

Investors Will Want BH Global's (SGX:BQN) Growth In ROCE To Persist

SGX:BQN
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Did you know there are some financial metrics that can provide clues of a potential 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at BH Global (SGX:BQN) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on BH Global is:

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

0.08 = S$5.3m ÷ (S$85m - S$18m) (Based on the trailing twelve months to December 2021).

Thus, BH Global has an ROCE of 8.0%. Even though it's in line with the industry average of 8.4%, it's still a low return by itself.

See our latest analysis for BH Global

roce
SGX:BQN Return on Capital Employed August 5th 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for BH Global's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of BH Global, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

BH Global has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 8.0% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 21%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

To sum it up, BH Global is collecting higher returns from the same amount of capital, and that's impressive. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 20% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing: We've identified 3 warning signs with BH Global (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

While BH Global 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.

Valuation is complex, but we're helping make it simple.

Find out whether BH Global is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.