In This Article:
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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Mewah International (SGX:MV4) 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. Analysts use this formula to calculate it for Mewah International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$100m ÷ (US$1.5b - US$558m) (Based on the trailing twelve months to December 2023).
Therefore, Mewah International has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Food industry.
See our latest analysis for Mewah International
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mewah International's ROCE against it's prior returns. If you'd like to look at how Mewah International has performed in the past in other metrics, you can view this free graph of Mewah International's past earnings, revenue and cash flow.
What Can We Tell From Mewah International's ROCE Trend?
Investors would be pleased with what's happening at Mewah International. Over the last five years, returns on capital employed have risen substantially to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 56%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a related note, the company's ratio of current liabilities to total assets has decreased to 37%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Mewah International has. Considering the stock has delivered 19% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.