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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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. With that in mind, we've noticed some promising trends at Heeton Holdings (SGX:5DP) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Heeton Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = S$24m ÷ (S$979m - S$169m) (Based on the trailing twelve months to June 2024).
Therefore, Heeton Holdings has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 5.0%.
Check out our latest analysis for Heeton Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Heeton Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Heeton Holdings.
The Trend Of ROCE
While there are companies with higher returns on capital out there, we still find the trend at Heeton Holdings promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 133% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
Our Take On Heeton Holdings' ROCE
To sum it up, Heeton Holdings is collecting higher returns from the same amount of capital, and that's impressive. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing to note, we've identified 2 warning signs with Heeton Holdings and understanding them should be part of your investment process.