There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Chemical Industries (Far East) (SGX:C05) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
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 Chemical Industries (Far East) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = S$5.6m ÷ (S$145m - S$12m) (Based on the trailing twelve months to September 2022).
Therefore, Chemical Industries (Far East) has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.5%.
Check out our latest analysis for Chemical Industries (Far East)
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'd like to look at how Chemical Industries (Far East) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at Chemical Industries (Far East). The company has employed 29% more capital in the last five years, and the returns on that capital have remained stable at 4.2%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line
As we've seen above, Chemical Industries (Far East)'s returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 1.7% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
On a final note, we found 4 warning signs for Chemical Industries (Far East) (3 are a bit unpleasant) you should be aware of.