What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. 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.
Return On Capital Employed (ROCE): What is it?
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)
0.016 = S$1.1m ÷ (S$76m - S$9.6m) (Based on the trailing twelve months to June 2020).
Therefore, AP Oil International has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for AP Oil International's ROCE against it's prior returns. If you're interested in investigating AP Oil International's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From AP Oil International's ROCE Trend?
When we looked at the ROCE trend at AP Oil International, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.6% from 8.3% five years ago. However it looks like AP Oil International might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.
Our Take On AP Oil International's ROCE
In summary, AP Oil International is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 37% over the last five years, investors may not be too optimistic on this trend improving either. 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 a bit unpleasant) we think you should know about.
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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