What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Chemical Industries (Far East) (SGX:C05) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.038 = S$4.9m ÷ (S$144m - S$17m) (Based on the trailing twelve months to September 2021).
Therefore, Chemical Industries (Far East) has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 16%.
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.
How Are Returns Trending?
While there are companies with higher returns on capital out there, we still find the trend at Chemical Industries (Far East) promising. The figures show that over the last five years, ROCE has grown 48% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
What We Can Learn From Chemical Industries (Far East)'s ROCE
To sum it up, Chemical Industries (Far East) is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 11% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Chemical Industries (Far East) (of which 1 is a bit unpleasant!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.