AP Oil International (SGX:5AU) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at AP Oil International (SGX:5AU) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. The formula for this calculation on AP Oil International is:

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

0.0096 = S$652k ÷ (S$76m - S$8.9m) (Based on the trailing twelve months to December 2020).

So, AP Oil International has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 11%.

View our latest analysis for AP Oil International

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 AP Oil International, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at AP Oil International doesn't inspire confidence. To be more specific, ROCE has fallen from 6.0% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that AP Oil International is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

AP Oil International does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

While AP Oil International may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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