This article is intended for those of you who are at the beginning of your investing journey and looking to gauge the potential return on investment in Chasen Holdings Limited (SGX:5NV).
Buying Chasen Holdings makes you a partial owner of the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. To understand Chasen Holdings’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
Calculating Return On Capital Employed for 5NV
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Chasen Holdings is good at growing investor capital. 5NV’s ROCE is calculated below:
ROCE Calculation for 5NV
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = S$5.74m ÷ (S$132.62m – S$53.03m) = 7.21%
5NV’s 7.21% ROCE means that for every SGD100 you invest, the company creates SGD7.2. This shows Chasen Holdings provides a dull capital return that is below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if 5NV is clever with their reinvestments or dividend payments, investors can still grow their capital but may fall behind other more attractive opportunities in the market.
A deeper look
The underperforming ROCE is not ideal for Chasen Holdings investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, 5NV’s ROCE may increase, in which case your portfolio could benefit from holding the company. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking at the past 3 year period shows us that 5NV boosted investor return on capital employed from 1.41%. Similarly, the movement in the earnings variable shows a jump from S$1.10m to S$5.74m whilst capital employed improved as well albeit by a relatively smaller amount, signifying ROCE increased as a result of a greater surge in earnings compared to the business’ use of capital.
ROCE for 5NV investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine if an opportunity exists that isn’t made apparent by looking at past data. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for 5NV’s future growth? Take a look at our free research report of analyst consensus for 5NV’s outlook.
- Valuation: What is 5NV worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether 5NV is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.