Returns At Sapphire (SGX:BRD) Are On The Way Up

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Sapphire's (SGX:BRD) returns on capital, so let's have a look.

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 Sapphire:

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

0.025 = CN¥16m ÷ (CN¥746m - CN¥113m) (Based on the trailing twelve months to December 2020).

So, Sapphire has an ROCE of 2.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 1.5%.

View our latest analysis for Sapphire

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

What The Trend Of ROCE Can Tell Us

The fact that Sapphire is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.5% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Sapphire is utilizing 27% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 15%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Sapphire has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

In summary, it's great to see that Sapphire has managed to break into profitability and is continuing to reinvest in its business. Although the company may be facing some issues elsewhere since the stock has plunged 77% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

On a final note, we found 5 warning signs for Sapphire (2 are concerning) 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.

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

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.