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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? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Hiap Seng Industries (SGX:1L2) and its trend of ROCE, we really liked what we saw.
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. To calculate this metric for Hiap Seng Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = S$2.1m ÷ (S$26m - S$6.3m) (Based on the trailing twelve months to March 2024).
So, Hiap Seng Industries has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.
View our latest analysis for Hiap Seng Industries
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hiap Seng Industries' ROCE against it's prior returns. If you'd like to look at how Hiap Seng Industries has performed in the past in other metrics, you can view this free graph of Hiap Seng Industries' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Hiap Seng Industries has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 11% which is a sight for sore eyes. Not only that, but the company is utilizing 149% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 24%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Key Takeaway
Overall, Hiap Seng Industries gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. However the stock is down a substantial 94% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.