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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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Asia Enterprises Holding (SGX:A55) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Asia Enterprises Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = S$5.5m ÷ (S$110m - S$3.1m) (Based on the trailing twelve months to June 2022).
Thus, Asia Enterprises Holding has an ROCE of 5.2%. In absolute terms, that's a low return but it's around the Trade Distributors industry average of 5.7%.
See our latest analysis for Asia Enterprises Holding
Historical performance is a great place to start when researching a stock so above you can see the gauge for Asia Enterprises Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Asia Enterprises Holding, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Asia Enterprises Holding has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 1,948% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Key Takeaway
To bring it all together, Asia Enterprises Holding has done well to increase the returns it's generating from its capital employed. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Asia Enterprises Holding does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...