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To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at BBR Holdings (S) (SGX:KJ5) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on BBR Holdings (S) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = S$16m ÷ (S$341m - S$189m) (Based on the trailing twelve months to December 2023).
Therefore, BBR Holdings (S) has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 6.8% it's much better.
Check out our latest analysis for BBR Holdings (S)
Historical performance is a great place to start when researching a stock so above you can see the gauge for BBR Holdings (S)'s ROCE against it's prior returns. If you're interested in investigating BBR Holdings (S)'s past further, check out this free graph covering BBR Holdings (S)'s past earnings, revenue and cash flow.
So How Is BBR Holdings (S)'s ROCE Trending?
Like most people, we're pleased that BBR Holdings (S) is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 11% on their capital employed. Additionally, the business is utilizing 37% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 55% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
In Conclusion...
In the end, BBR Holdings (S) has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 30% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.