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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in ASL Marine Holdings' (SGX:A04) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on ASL Marine Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = S$28m ÷ (S$543m - S$335m) (Based on the trailing twelve months to June 2024).
So, ASL Marine Holdings has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Machinery industry.
Check out our latest analysis for ASL Marine Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for ASL Marine Holdings' ROCE against it's prior returns. If you're interested in investigating ASL Marine Holdings' past further, check out this free graph covering ASL Marine Holdings' past earnings, revenue and cash flow.
How Are Returns Trending?
It's great to see that ASL Marine Holdings has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 14% on their capital employed. Additionally, the business is utilizing 58% 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. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
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. The current liabilities has increased to 62% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.