If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Chasen Holdings (SGX:5NV) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Chasen Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = S$7.9m ÷ (S$189m - S$79m) (Based on the trailing twelve months to March 2022).
Thus, Chasen Holdings has an ROCE of 7.1%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.
View our latest analysis for Chasen Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Chasen Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Chasen Holdings, check out these free graphs here.
What Does the ROCE Trend For Chasen Holdings Tell Us?
On the surface, the trend of ROCE at Chasen Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 9.2% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Another thing to note, Chasen Holdings has a high ratio of current liabilities to total assets of 42%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Chasen Holdings is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 21% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.