CosmoSteel Holdings (SGX:B9S) Is Looking To Continue Growing Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. So when we looked at CosmoSteel Holdings (SGX:B9S) and its trend of ROCE, we really liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for CosmoSteel Holdings, this is the formula:

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

0.019 = S$1.8m ÷ (S$102m - S$8.0m) (Based on the trailing twelve months to September 2021).

Therefore, CosmoSteel Holdings has an ROCE of 1.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 1.9%.

View our latest analysis for CosmoSteel 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're interested in investigating CosmoSteel Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Like most people, we're pleased that CosmoSteel Holdings is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.9% on their capital employed. In regards to capital employed, CosmoSteel Holdings is using 22% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

The Bottom Line On CosmoSteel Holdings' ROCE

From what we've seen above, CosmoSteel Holdings has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 19% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know about the risks facing CosmoSteel Holdings, we've discovered 2 warning signs that you should be aware of.

While CosmoSteel Holdings 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. 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.