Will Oceanus Group's (SGX:579) Growth In ROCE Persist?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Oceanus Group's (SGX:579) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Oceanus Group:

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

0.021 = CN¥3.8m ÷ (CN¥296m - CN¥110m) (Based on the trailing twelve months to September 2020).

Thus, Oceanus Group has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Food industry average of 10%.

Check out our latest analysis for Oceanus Group

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 Oceanus Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Oceanus Group Tell Us?

It's great to see that Oceanus Group has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 2.1% on their capital employed. In regards to capital employed, Oceanus Group is using 38% 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. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

In Conclusion...

In summary, it's great to see that Oceanus Group has been able to turn things around and earn higher returns on lower amounts of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Oceanus Group can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Oceanus Group and understanding this should be part of your investment process.

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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