- Trade Distributors
There's Been No Shortage Of Growth Recently For HG Metal Manufacturing's (SGX:BTG) Returns On Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at HG Metal Manufacturing (SGX:BTG) so let's look a bit deeper.
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. Analysts use this formula to calculate it for HG Metal Manufacturing:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = S$6.5m ÷ (S$158m - S$37m) (Based on the trailing twelve months to December 2022).
Therefore, HG Metal Manufacturing has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 7.9%.
See our latest analysis for HG Metal Manufacturing
Historical performance is a great place to start when researching a stock so above you can see the gauge for HG Metal Manufacturing's ROCE against it's prior returns. If you'd like to look at how HG Metal Manufacturing 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 HG Metal Manufacturing Tell Us?
HG Metal Manufacturing has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 5.3%, which is always encouraging. While returns have increased, the amount of capital employed by HG Metal Manufacturing has remained flat over the period. 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. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 23% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
The Bottom Line On HG Metal Manufacturing's ROCE
As discussed above, HG Metal Manufacturing appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has only returned 1.9% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for HG Metal Manufacturing (of which 1 is a bit concerning!) that you should know about.
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.
HG Metal Manufacturing
HG Metal Manufacturing Limited, an investment holding company, primarily trades in steel products in Indonesia, Malaysia, Myanmar, and Singapore.
Mediocre balance sheet and slightly overvalued.