The Return Trends At CosmoSteel Holdings (SGX:B9S) Look Promising

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at CosmoSteel Holdings (SGX:B9S) and its trend of ROCE, we really liked what we saw.

Understanding 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 CosmoSteel Holdings, this is the formula:

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

0.064 = S$5.8m ÷ (S$112m - S$22m) (Based on the trailing twelve months to September 2020).

So, CosmoSteel Holdings has an ROCE of 6.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.4%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of CosmoSteel Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Like most people, we're pleased that CosmoSteel Holdings is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 6.4% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 32% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Bottom Line On CosmoSteel Holdings' ROCE

In summary, it's great to see that CosmoSteel Holdings has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 20% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing, we've spotted 2 warning signs facing CosmoSteel Holdings that you might find interesting.

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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