The Return Trends At Isetan (Singapore) (SGX:I15) Look Promising

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Isetan (Singapore) (SGX:I15) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Isetan (Singapore) is:

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

0.019 = S$2.7m ÷ (S$190m - S$45m) (Based on the trailing twelve months to June 2022).

Therefore, Isetan (Singapore) has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 5.1%.

Our analysis indicates that I15 is potentially undervalued!

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

So How Is Isetan (Singapore)'s ROCE Trending?

Isetan (Singapore) has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 1.9% on its capital. While returns have increased, the amount of capital employed by Isetan (Singapore) 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. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

What We Can Learn From Isetan (Singapore)'s ROCE

To sum it up, Isetan (Singapore) is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 21% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Isetan (Singapore) (of which 1 is a bit unpleasant!) that you should know about.

While Isetan (Singapore) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.