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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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Enviro-Hub Holdings (SGX:L23) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Enviro-Hub Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = S$2.0m ÷ (S$139m - S$41m) (Based on the trailing twelve months to June 2024).
Thus, Enviro-Hub Holdings has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.3%.
Check out our latest analysis for Enviro-Hub Holdings
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Enviro-Hub Holdings.
So How Is Enviro-Hub Holdings' ROCE Trending?
While the ROCE is still rather low for Enviro-Hub Holdings, we're glad to see it heading in the right direction. The figures show that over the last five years, returns on capital have grown by 195%. The company is now earning S$0.02 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 40% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
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. Effectively this means that suppliers or short-term creditors are now funding 29% of the business, which is more than it was five years ago. 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.