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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in SIIC Environment Holdings' (SGX:BHK) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for SIIC Environment Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = CN¥2.1b ÷ (CN¥41b - CN¥8.1b) (Based on the trailing twelve months to March 2023).
Therefore, SIIC Environment Holdings has an ROCE of 6.4%. On its own, that's a low figure but it's around the 7.1% average generated by the Water Utilities industry.
See our latest analysis for SIIC Environment Holdings
Above you can see how the current ROCE for SIIC Environment Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.4%. The amount of capital employed has increased too, by 65%. 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.
In Conclusion...
In summary, it's great to see that SIIC Environment Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 34% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
SIIC Environment Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...