What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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, Hiap Tong (Catalist:5PO) looks quite promising in regards to its trends of return on capital.
Understanding 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. To calculate this metric for Hiap Tong, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = S$12m ÷ (S$202m - S$58m) (Based on the trailing twelve months to September 2023).
Therefore, Hiap Tong has an ROCE of 8.6%. Even though it's in line with the industry average of 8.7%, it's still a low return by itself.
See our latest analysis for Hiap Tong
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're interested in investigating Hiap Tong's past further, check out this free graph covering Hiap Tong's past earnings, revenue and cash flow.
What Can We Tell From Hiap Tong's ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 8.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 22% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On Hiap Tong's ROCE
All in all, it's terrific to see that Hiap Tong is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 49% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
Like most companies, Hiap Tong does come with some risks, and we've found 4 warning signs that you should be aware of.