We're Watching These Trends At Amara Holdings (SGX:A34)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after briefly looking over the numbers, we don't think Amara Holdings (SGX:A34) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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

0.02 = S$15m ÷ (S$816m - S$32m) (Based on the trailing twelve months to June 2020).

Therefore, Amara Holdings has an ROCE of 2.0%. Even though it's in line with the industry average of 2.0%, it's still a low return by itself.

Check out 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're interested in investigating Amara Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Amara Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.0% from 3.6% 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...

We're a bit apprehensive about Amara Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 6.9% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Amara Holdings does have some risks, we noticed 3 warning signs (and 2 which shouldn't be ignored) we think you should 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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