ISDN Holdings (SGX:I07) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating ISDN Holdings (SGX:I07), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for ISDN Holdings:

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

0.072 = S$22m ÷ (S$406m - S$103m) (Based on the trailing twelve months to June 2024).

Therefore, ISDN Holdings has an ROCE of 7.2%. In absolute terms, that's a low return but it's around the Electrical industry average of 8.2%.

Check out our latest analysis for ISDN Holdings

Above you can see how the current ROCE for ISDN Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ISDN Holdings for free.

The Trend Of ROCE

When we looked at the ROCE trend at ISDN Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.2% from 11% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From ISDN Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by ISDN Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 85% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing ISDN Holdings that you might find interesting.

While ISDN Holdings 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.