Investors Will Want Raffles Infrastructure Holdings' (SGX:LUY) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Raffles Infrastructure Holdings' (SGX:LUY) 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. To calculate this metric for Raffles Infrastructure Holdings, this is the formula:

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

0.021 = CN¥5.6m ÷ (CN¥437m - CN¥175m) (Based on the trailing twelve months to December 2022).

So, Raffles Infrastructure Holdings has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 4.1%.

Check out our latest analysis for Raffles Infrastructure Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Raffles Infrastructure Holdings, check out these free graphs here.

The Trend Of ROCE

The fact that Raffles Infrastructure Holdings is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.1% on its capital. Not only that, but the company is utilizing 1,481% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Raffles Infrastructure Holdings has decreased current liabilities to 40% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Raffles Infrastructure Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Raffles Infrastructure Holdings' ROCE

In summary, it's great to see that Raffles Infrastructure Holdings 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 92% in the last three years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One more thing, we've spotted 2 warning signs facing Raffles Infrastructure Holdings that you might find interesting.

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. 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.