What Do The Returns At Heeton Holdings (SGX:5DP) Mean Going Forward?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Heeton Holdings (SGX:5DP) looks quite promising in regards to its trends of return on capital.

What is 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. To calculate this metric for Heeton Holdings, this is the formula:

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

0.0064 = S$6.0m ÷ (S$997m - S$55m) (Based on the trailing twelve months to June 2020).

Therefore, Heeton Holdings has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 2.0%.

Check out our latest analysis for Heeton Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Heeton Holdings' ROCE against it's prior returns. If you'd like to look at how Heeton Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Heeton Holdings' ROCE Trending?

The fact that Heeton Holdings is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 0.6% on its capital. Not only that, but the company is utilizing 51% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 5.5%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Heeton Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Heeton Holdings' ROCE

To the delight of most shareholders, Heeton Holdings has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 37% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 2 warning signs we've spotted with Heeton Holdings (including 1 which is significant) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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