Returns Are Gaining Momentum At Hoe Leong (SGX:H20)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Hoe Leong (SGX:H20) looks quite promising in regards to its trends of return on capital.

What is 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. To calculate this metric for Hoe Leong, this is the formula:

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

0.034 = S$817k ÷ (S$44m - S$20m) (Based on the trailing twelve months to September 2021).

Thus, Hoe Leong has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.9%.

View our latest analysis for Hoe Leong

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

How Are Returns Trending?

We're delighted to see that Hoe Leong is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.4%, which is always encouraging. While returns have increased, the amount of capital employed by Hoe Leong has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

One more thing to note, Hoe Leong has decreased current liabilities to 45% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Key Takeaway

In summary, we're delighted to see that Hoe Leong has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 93% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

One final note, you should learn about the 6 warning signs we've spotted with Hoe Leong (including 3 which shouldn't be ignored) .

While Hoe Leong 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.

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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.