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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at OKP Holdings (SGX:5CF) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on OKP Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = S$6.0m ÷ (S$259m - S$55m) (Based on the trailing twelve months to December 2023).
Therefore, OKP Holdings has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.8%.
See our latest analysis for OKP Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for OKP Holdings' ROCE against it's prior returns. If you're interested in investigating OKP Holdings' past further, check out this free graph covering OKP Holdings' past earnings, revenue and cash flow.
So How Is OKP Holdings' ROCE Trending?
When we looked at the ROCE trend at OKP Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.3% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
In Conclusion...
While returns have fallen for OKP Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 85% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
On a separate note, we've found 2 warning signs for OKP Holdings you'll probably want to know about.
While OKP Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.