What Do The Returns At Keppel Infrastructure Trust (SGX:A7RU) Mean Going Forward?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Keppel Infrastructure Trust (SGX:A7RU) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Keppel Infrastructure Trust:

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

0.051 = S$200m ÷ (S$5.0b - S$1.0b) (Based on the trailing twelve months to June 2020).

Thus, Keppel Infrastructure Trust has an ROCE of 5.1%. In absolute terms, that's a low return, but it's much better than the Integrated Utilities industry average of 3.9%.

View our latest analysis for Keppel Infrastructure Trust

In the above chart we have measured Keppel Infrastructure Trust's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Keppel Infrastructure Trust is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 192% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 21% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Keppel Infrastructure Trust's ROCE

To bring it all together, Keppel Infrastructure Trust has done well to increase the returns it's generating from its capital employed. And with a respectable 49% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Keppel Infrastructure Trust, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Keppel Infrastructure Trust 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.

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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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