Returns On Capital At Chemical Industries (Far East) (SGX:C05) Have Stalled

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Chemical Industries (Far East) (SGX:C05) 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)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Chemical Industries (Far East), this is the formula:

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

0.042 = S$5.6m ÷ (S$145m - S$12m) (Based on the trailing twelve months to September 2022).

Therefore, Chemical Industries (Far East) has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.5%.

Check out our latest analysis for Chemical Industries (Far East)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chemical Industries (Far East)'s ROCE against it's prior returns. If you'd like to look at how Chemical Industries (Far East) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Chemical Industries (Far East)

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Chemical Industries (Far East). Over the past five years, ROCE has remained relatively flat at around 4.2% and the business has deployed 29% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

As we've seen above, Chemical Industries (Far East)'s returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 15% 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.

If you want to know some of the risks facing Chemical Industries (Far East) we've found 5 warning signs (3 are significant!) that you should be aware of before investing here.

While Chemical Industries (Far East) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.