There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at South Ocean Holdings (JSE:SOH) 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. Analysts use this formula to calculate it for South Ocean Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = R102m ÷ (R936m - R358m) (Based on the trailing twelve months to June 2021).
Therefore, South Ocean Holdings has an ROCE of 18%. That's a pretty standard return and it's in line with the industry average of 18%.
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're interested in investigating South Ocean Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Shareholders will be relieved that South Ocean Holdings has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 18%, 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. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Key Takeaway
To bring it all together, South Ocean Holdings has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you'd like to know more about South Ocean Holdings, we've spotted 4 warning signs, and 1 of them is a bit unpleasant.
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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