Renaissance United (SGX:I11) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Renaissance United (SGX:I11) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Renaissance United, this is the formula:

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

0.059 = S$4.8m ÷ (S$132m - S$51m) (Based on the trailing twelve months to April 2021).

So, Renaissance United has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 8.4%.

See our latest analysis for Renaissance United

Historical performance is a great place to start when researching a stock so above you can see the gauge for Renaissance United's ROCE against it's prior returns. If you're interested in investigating Renaissance United's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Renaissance United's ROCE Trending?

You'd find it hard not to be impressed with the ROCE trend at Renaissance United. The figures show that over the last five years, returns on capital have grown by 1,638%. The company is now earning S$0.06 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 30% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Renaissance United may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 38% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Renaissance United's ROCE

In the end, Renaissance United has proven it's capital allocation skills are good with those higher returns from less amount of capital.

On a final note, we found 3 warning signs for Renaissance United (1 is a bit unpleasant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

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