What Do The Returns On Capital At Civmec (SGX:P9D) Tell Us?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Civmec (SGX:P9D) 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?

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. To calculate this metric for Civmec, this is the formula:

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

0.092 = AU$38m ÷ (AU$606m - AU$193m) (Based on the trailing twelve months to December 2020).

Therefore, Civmec has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 1.7% generated by the Construction industry, it's much better.

Check out our latest analysis for Civmec

Historical performance is a great place to start when researching a stock so above you can see the gauge for Civmec's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Civmec, check out these free graphs here.

What Does the ROCE Trend For Civmec Tell Us?

In terms of Civmec's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.2% from 16% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Civmec. And the stock has followed suit returning a meaningful 67% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we found 3 warning signs for Civmec (1 is a bit concerning) you should be aware of.

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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