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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Koh Brothers Group (SGX:K75) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Koh Brothers Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = S$7.2m ÷ (S$833m - S$276m) (Based on the trailing twelve months to June 2022).
Thus, Koh Brothers Group has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 2.0%.
View our latest analysis for Koh Brothers Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Koh Brothers Group's ROCE against it's prior returns. If you'd like to look at how Koh Brothers Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
Koh Brothers Group has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 1.3% on its capital. In addition to that, Koh Brothers Group is employing 55% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
One more thing to note, Koh Brothers Group has decreased current liabilities to 33% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
Our Take On Koh Brothers Group's ROCE
To the delight of most shareholders, Koh Brothers Group has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 57% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.