Will Powermatic Data Systems' (SGX:BCY) Growth In ROCE Persist?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Powermatic Data Systems (SGX:BCY) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Powermatic Data Systems, this is the formula:

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

0.12 = S$8.2m ÷ (S$76m - S$7.9m) (Based on the trailing twelve months to September 2020).

So, Powermatic Data Systems has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 7.0% it's much better.

See our latest analysis for Powermatic Data Systems

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 Powermatic Data Systems has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Powermatic Data Systems are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 12%. 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 47%. So we're very much inspired by what we're seeing at Powermatic Data Systems thanks to its ability to profitably reinvest capital.

The Bottom Line On Powermatic Data Systems' ROCE

All in all, it's terrific to see that Powermatic Data Systems is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 245% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Powermatic Data Systems can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Powermatic Data Systems that we think you should be aware of.

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This article by Simply Wall St is general in nature. 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.
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