Hour Glass (SGX:AGS) Knows How To Allocate Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Hour Glass (SGX:AGS) we really liked what we saw.

What Is 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 Hour Glass, this is the formula:

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

0.24 = S$206m ÷ (S$1.1b - S$195m) (Based on the trailing twelve months to September 2023).

Thus, Hour Glass has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 9.1%.

Check out our latest analysis for Hour Glass

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

What Does the ROCE Trend For Hour Glass Tell Us?

Hour Glass is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 24%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 60%. So we're very much inspired by what we're seeing at Hour Glass thanks to its ability to profitably reinvest capital.

What We Can Learn From Hour Glass' ROCE

To sum it up, Hour Glass has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 194% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Hour Glass, you might be interested to know about the 1 warning sign that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.