Our Take On The Returns On Capital At SUTL Enterprise (SGX:BHU)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think SUTL Enterprise (SGX:BHU) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 SUTL Enterprise:

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

0.017 = S$2.0m ÷ (S$128m - S$13m) (Based on the trailing twelve months to June 2020).

Thus, SUTL Enterprise has an ROCE of 1.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 2.0%.

See our latest analysis for SUTL Enterprise

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

What Can We Tell From SUTL Enterprise's ROCE Trend?

In terms of SUTL Enterprise's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.7% from 6.4% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a side note, SUTL Enterprise has done well to pay down its current liabilities to 10% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On SUTL Enterprise's ROCE

In summary, we're somewhat concerned by SUTL Enterprise's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 47% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we've found 4 warning signs for SUTL Enterprise that we think you should be aware of.

While SUTL Enterprise isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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