Pavillon Holdings (SGX:596) Is Experiencing Growth In Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Pavillon Holdings (SGX:596) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Pavillon Holdings is:

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

0.062 = S$6.3m ÷ (S$118m - S$15m) (Based on the trailing twelve months to December 2024).

So, Pavillon Holdings has an ROCE of 6.2%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 3.1%.

View our latest analysis for Pavillon 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Pavillon Holdings.

So How Is Pavillon Holdings' ROCE Trending?

We're delighted to see that Pavillon Holdings is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 6.2% on its capital. In addition to that, Pavillon Holdings is employing 171% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On Pavillon Holdings' ROCE

In summary, it's great to see that Pavillon Holdings has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 42% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Pavillon Holdings can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 4 warning signs with Pavillon Holdings (at least 2 which are concerning) , and understanding these would certainly be useful.

While Pavillon Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.