Returns On Capital - An Important Metric For Sheng Siong Group (SGX:OV8)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Sheng Siong Group's (SGX:OV8) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Sheng Siong Group:

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

0.40 = S$165m ÷ (S$692m - S$275m) (Based on the trailing twelve months to December 2020).

Thus, Sheng Siong Group has an ROCE of 40%. That's a fantastic return and not only that, it outpaces the average of 7.7% earned by companies in a similar industry.

View our latest analysis for Sheng Siong Group

Above you can see how the current ROCE for Sheng Siong Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sheng Siong Group.

So How Is Sheng Siong Group's ROCE Trending?

The trends we've noticed at Sheng Siong Group are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 40%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 69%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Sheng Siong Group's ROCE

In summary, it's great to see that Sheng Siong Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 112% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing: We've identified 2 warning signs with Sheng Siong Group (at least 1 which can't be ignored) , and understanding them would certainly be useful.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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