Returns on Capital Paint A Bright Future For Parkson Retail Asia (SGX:O9E)

What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Parkson Retail Asia's (SGX:O9E) look very promising so lets take a look.

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 Parkson Retail Asia is:

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

0.45 = S$62m ÷ (S$312m - S$176m) (Based on the trailing twelve months to September 2022).

Thus, Parkson Retail Asia has an ROCE of 45%. That's a fantastic return and not only that, it outpaces the average of 5.6% earned by companies in a similar industry.

See our latest analysis for Parkson Retail Asia

Historical performance is a great place to start when researching a stock so above you can see the gauge for Parkson Retail Asia's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Parkson Retail Asia, check out these free graphs here.

What Can We Tell From Parkson Retail Asia's ROCE Trend?

Parkson Retail Asia has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 45% which is a sight for sore eyes. In addition to that, Parkson Retail Asia is employing 23% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Another thing to note, Parkson Retail Asia has a high ratio of current liabilities to total assets of 56%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

Overall, Parkson Retail Asia gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has fallen 14% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Parkson Retail Asia (of which 1 is potentially serious!) that you should know about.

Parkson Retail Asia is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.