If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Penguin International (SGX:BTM) looks quite promising in regards to its trends of return on capital.
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 Penguin International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = S$15m ÷ (S$286m - S$73m) (Based on the trailing twelve months to June 2022).
Thus, Penguin International has an ROCE of 7.2%. On its own, that's a low figure but it's around the 6.5% average generated by the Machinery industry.
See our latest analysis for Penguin International
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 Penguin International's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
The fact that Penguin International is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 7.2% which is a sight for sore eyes. In addition to that, Penguin International is employing 46% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
Our Take On Penguin International's ROCE
Long story short, we're delighted to see that Penguin International's reinvestment activities have paid off and the company is now profitable. And a remarkable 112% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Penguin International can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing Penguin International we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.