What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Baker Technology (SGX:BTP) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Baker Technology, this is the formula:

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

0.027 = S$6.9m ÷ (S$279m - S$26m) (Based on the trailing twelve months to December 2023).

Therefore, Baker Technology has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 8.0%.

View our latest analysis for Baker Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Baker Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Baker Technology.

The Trend Of ROCE

Shareholders will be relieved that Baker Technology has broken into profitability. The company now earns 2.7% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Baker Technology has remained flat over the period. 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. Because in the end, a business can only get so efficient.

The Key Takeaway

As discussed above, Baker Technology appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 34% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you'd like to know about the risks facing Baker Technology, we've discovered 3 warning signs that you should be aware of.