EnGro (SGX:S44) Shareholders Will Want The ROCE Trajectory To Continue

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in EnGro's (SGX:S44) returns on capital, so let's have a 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 EnGro, this is the formula:

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

0.031 = S$9.4m ÷ (S$326m - S$26m) (Based on the trailing twelve months to June 2023).

Therefore, EnGro has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 7.6%.

Check out our latest analysis for EnGro

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'd like to look at how EnGro has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is EnGro's ROCE Trending?

The fact that EnGro is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 3.1% which is a sight for sore eyes. Not only that, but the company is utilizing 36% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From EnGro's ROCE

Long story short, we're delighted to see that EnGro's reinvestment activities have paid off and the company is now profitable. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 8.2% to shareholders. So with that in mind, we think the stock deserves further research.

EnGro does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

While EnGro 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.