Returns On Capital Are Showing Encouraging Signs At EnGro (SGX:S44)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 EnGro (SGX:S44) and its trend of ROCE, we really liked what we saw.

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Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on EnGro is:

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

0.012 = S$3.4m ÷ (S$324m - S$35m) (Based on the trailing twelve months to December 2024).

Thus, EnGro has an ROCE of 1.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 1.2%.

View our latest analysis for EnGro

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

What Can We Tell From EnGro's ROCE Trend?

EnGro has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 1.2% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by EnGro has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

The Bottom Line On EnGro's ROCE

To bring it all together, EnGro has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 49% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

EnGro does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

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.