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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Renaissance United (SGX:I11) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Renaissance United:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = S$5.1m ÷ (S$90m - S$44m) (Based on the trailing twelve months to April 2024).
So, Renaissance United has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Gas Utilities industry.
See our latest analysis for Renaissance United
Historical performance is a great place to start when researching a stock so above you can see the gauge for Renaissance United's ROCE against it's prior returns. If you're interested in investigating Renaissance United's past further, check out this free graph covering Renaissance United's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Renaissance United is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 11% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 46%. 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. Essentially the business now has suppliers or short-term creditors funding about 49% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
The Key Takeaway
In a nutshell, we're pleased to see that Renaissance United has been able to generate higher returns from less capital.