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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Gallant Venture (SGX:5IG) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Gallant Venture:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = S$19m ÷ (S$1.4b - S$251m) (Based on the trailing twelve months to June 2024).
Thus, Gallant Venture has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Integrated Utilities industry average of 5.8%.
Check out our latest analysis for Gallant Venture
Historical performance is a great place to start when researching a stock so above you can see the gauge for Gallant Venture's ROCE against it's prior returns. If you'd like to look at how Gallant Venture has performed in the past in other metrics, you can view this free graph of Gallant Venture's past earnings, revenue and cash flow.
How Are Returns Trending?
While the ROCE is still rather low for Gallant Venture, we're glad to see it heading in the right direction. We found that the returns on capital employed over the last five years have risen by 1,942%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 65% less capital than it was five years ago. Gallant Venture may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a related note, the company's ratio of current liabilities to total assets has decreased to 18%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Gallant Venture has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.