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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? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Enviro-Hub Holdings' (SGX:L23) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Enviro-Hub Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = S$2.8m ÷ (S$139m - S$41m) (Based on the trailing twelve months to June 2024).
So, Enviro-Hub Holdings has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.1%.
Check out our latest analysis for Enviro-Hub Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Enviro-Hub Holdings' ROCE against it's prior returns. If you're interested in investigating Enviro-Hub Holdings' past further, check out this free graph covering Enviro-Hub Holdings' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. We found that the returns on capital employed over the last five years have risen by 303%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Enviro-Hub Holdings appears to been achieving more with less, since the business is using 40% less capital to run its operation. Enviro-Hub Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 29% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.