Returns On Capital Signal Tricky Times Ahead For Amara Holdings (SGX:A34)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Amara Holdings (SGX:A34) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Amara Holdings is:

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

0.01 = S$7.9m ÷ (S$808m - S$27m) (Based on the trailing twelve months to December 2020).

Thus, Amara Holdings has an ROCE of 1.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 0.9%.

See our latest analysis for Amara Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Amara Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Amara Holdings, check out these free graphs here.

The Trend Of ROCE

In terms of Amara Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.0% from 3.1% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

In summary, we're somewhat concerned by Amara Holdings' diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 14% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 2 warning signs for Amara Holdings you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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