If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s 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. Speaking of which, we noticed some great changes in CSC Holdings’ (SGX:C06) returns on capital, so let’s have a look.
What is Return On Capital Employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for CSC Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.074 = S$13m ÷ (S$365m – S$195m) (Based on the trailing twelve months to March 2020).
Thus, CSC Holdings has an ROCE of 7.4%. On its own that’s a low return, but compared to the average of 3.9% generated by the Construction industry, it’s much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for CSC Holdings’ ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of CSC Holdings, check out these free graphs here.
So How Is CSC Holdings’ ROCE Trending?
Shareholders will be relieved that CSC Holdings has broken into profitability. While the business was unprofitable in the past, it’s now turned things around and is earning 7.4% on its capital. 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.Another thing to note, CSC Holdings has a high ratio of current liabilities to total assets of 53%. 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. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On CSC Holdings’ ROCE
As discussed above, CSC Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 51% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing to note, we’ve identified 3 warning signs with CSC Holdings and understanding them should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
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