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What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Credit Bureau Asia (SGX:TCU), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
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. To calculate this metric for Credit Bureau Asia, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.36 = S$27m ÷ (S$97m - S$24m) (Based on the trailing twelve months to June 2024).
Therefore, Credit Bureau Asia has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 23% earned by companies in a similar industry.
View our latest analysis for Credit Bureau Asia
Historical performance is a great place to start when researching a stock so above you can see the gauge for Credit Bureau Asia'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 Credit Bureau Asia.
What Does the ROCE Trend For Credit Bureau Asia Tell Us?
On the surface, the trend of ROCE at Credit Bureau Asia doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 50% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Credit Bureau Asia has done well to pay down its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.