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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? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Stamford Land (SGX:H07), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Stamford Land is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = S$39m ÷ (S$1.1b - S$32m) (Based on the trailing twelve months to September 2024).
So, Stamford Land has an ROCE of 3.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.7%.
Check out our latest analysis for Stamford Land
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Stamford Land's past further, check out this free graph covering Stamford Land's past earnings, revenue and cash flow.
So How Is Stamford Land's ROCE Trending?
When we looked at the ROCE trend at Stamford Land, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.7% from 6.3% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Stamford Land has done well to pay down its current liabilities to 3.0% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
In Conclusion...
To conclude, we've found that Stamford Land is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 14% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.