We Like These Underlying Return On Capital Trends At Renaissance United (SGX:I11)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So when we looked at Renaissance United (SGX:I11) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Renaissance United is:

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

0.0081 = S$685k ÷ (S$135m - S$51m) (Based on the trailing twelve months to January 2022).

Therefore, Renaissance United has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 8.0%.

Check out 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'd like to look at how Renaissance United has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Renaissance United's ROCE Trending?

It's great to see that Renaissance United has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 0.8% which is no doubt a relief for some early shareholders. In regards to capital employed, Renaissance United is using 31% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Renaissance United could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. 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 Key Takeaway

In a nutshell, we're pleased to see that Renaissance United has been able to generate higher returns from less capital.

If you'd like to know more about Renaissance United, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

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.

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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.