Raffles Infrastructure Holdings (SGX:LUY) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after briefly looking over the numbers, we don't think Raffles Infrastructure Holdings (SGX:LUY) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 Raffles Infrastructure Holdings:

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

0.01 = CN¥2.6m ÷ (CN¥432m - CN¥181m) (Based on the trailing twelve months to June 2022).

Thus, Raffles Infrastructure Holdings has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 1.7%.

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'd like to look at how Raffles Infrastructure Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Raffles Infrastructure Holdings' ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 9.7% five years ago, while the business's capital employed increased by 1,253%. Usually this isn't ideal, but given Raffles Infrastructure Holdings conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Raffles Infrastructure Holdings probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Raffles Infrastructure Holdings has done well to pay down its current liabilities to 42% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Raffles Infrastructure Holdings is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 87% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

If you'd like to know more about Raffles Infrastructure Holdings, we've spotted 3 warning signs, and 2 of them don't sit too well with us.

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.