Dyna-Mac Holdings (SGX:NO4) Is Experiencing Growth In Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Dyna-Mac Holdings' (SGX:NO4) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Dyna-Mac Holdings is:

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

0.16 = S$12m ÷ (S$263m - S$190m) (Based on the trailing twelve months to June 2023).

Therefore, Dyna-Mac Holdings has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 5.9% generated by the Energy Services industry.

See our latest analysis for Dyna-Mac Holdings

Above you can see how the current ROCE for Dyna-Mac Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Like most people, we're pleased that Dyna-Mac Holdings is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 16% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 31% 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. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 72% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Dyna-Mac Holdings' ROCE

In the end, Dyna-Mac Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a staggering 182% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Dyna-Mac Holdings can keep these trends up, it could have a bright future ahead.

While Dyna-Mac Holdings looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether NO4 is currently trading for a fair price.

While Dyna-Mac 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.