Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Sheng Siong Group’s (SGX:OV8) returns on capital, so let’s have a look.
What is Return On Capital Employed (ROCE)?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from 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)
0.28 = S$104m ÷ (S$571m – S$196m) (Based on the trailing twelve months to March 2020).
Thus, Sheng Siong Group has an ROCE of 28%. That’s a fantastic return and not only that, it outpaces the average of 8.4% earned by companies in a similar industry.
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, you can check out the forecasts from the analysts covering Sheng Siong Group here for free.
What The Trend Of ROCE Can Tell Us
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 28%. 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 48%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what Sheng Siong Group has. And with the stock having performed exceptionally well over the last five years, these trends are being accounted for by investors. In light of that, we think it’s worth looking further into this stock because if Sheng Siong Group can keep these trends up, it could have a bright future ahead.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
Sheng Siong Group is not the only stock earning high returns. If you’d like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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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