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If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at SIIC Environment Holdings (SGX:BHK) and its ROCE trend, we weren't exactly thrilled.
What Is 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. To calculate this metric for SIIC Environment Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = CN¥2.0b ÷ (CN¥43b - CN¥8.3b) (Based on the trailing twelve months to March 2024).
Therefore, SIIC Environment Holdings has an ROCE of 5.7%. In absolute terms, that's a low return but it's around the Water Utilities industry average of 6.9%.
Check out our latest analysis for SIIC Environment Holdings
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of SIIC Environment Holdings.
So How Is SIIC Environment Holdings' ROCE Trending?
There are better returns on capital out there than what we're seeing at SIIC Environment Holdings. Over the past five years, ROCE has remained relatively flat at around 5.7% and the business has deployed 59% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
In conclusion, SIIC Environment Holdings has been investing more capital into the business, but returns on that capital haven't increased. And with the stock having returned a mere 2.7% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
SIIC Environment Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...