Returns At South Ocean Holdings (JSE:SOH) Are On The Way Up

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, South Ocean Holdings (JSE:SOH) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for South Ocean Holdings, this is the formula:

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

0.15 = R99m ÷ (R905m - R254m) (Based on the trailing twelve months to June 2022).

So, South Ocean Holdings has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electrical industry average of 18%.

See our latest analysis for South Ocean Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for South Ocean Holdings' ROCE against it's prior returns. If you'd like to look at how South Ocean Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

South Ocean Holdings has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 15%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a related note, the company's ratio of current liabilities to total assets has decreased to 28%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that South Ocean Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On South Ocean Holdings' ROCE

As discussed above, South Ocean Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 278% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, South Ocean Holdings does come with some risks, and we've found 4 warning signs that you should be aware of.

While South Ocean Holdings 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. 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.