We Like These Underlying Return On Capital Trends At Straits Trading (SGX:S20)

There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Straits Trading (SGX:S20) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Straits Trading, this is the formula:

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

0.018 = S$44m ÷ (S$3.1b - S$674m) (Based on the trailing twelve months to December 2020).

Thus, Straits Trading has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.7%.

See our latest analysis for Straits Trading

In the above chart we have measured Straits Trading's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Straits Trading's ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 1.8%. The amount of capital employed has increased too, by 37%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

In summary, it's great to see that Straits Trading can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 62% return over the last five years. In light of that, we think it's worth looking further into this stock because if Straits Trading can keep these trends up, it could have a bright future ahead.

Straits Trading does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

While Straits Trading 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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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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