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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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Multi-Chem (SGX:AWZ) so let's look a bit deeper.
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Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Multi-Chem is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = S$33m ÷ (S$402m - S$218m) (Based on the trailing twelve months to December 2024).
Therefore, Multi-Chem has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Electronic industry.
Check out our latest analysis for Multi-Chem
Historical performance is a great place to start when researching a stock so above you can see the gauge for Multi-Chem's ROCE against it's prior returns. If you're interested in investigating Multi-Chem's past further, check out this free graph covering Multi-Chem's past earnings, revenue and cash flow.
The Trend Of ROCE
Multi-Chem is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 18%. The amount of capital employed has increased too, by 52%. 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.
On a separate but related note, it's important to know that Multi-Chem has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. 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.
The Key Takeaway
To sum it up, Multi-Chem has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 500% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.