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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Sin Heng Heavy Machinery (SGX:BKA) 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 Sin Heng Heavy Machinery:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = S$7.1m ÷ (S$122m - S$7.7m) (Based on the trailing twelve months to June 2024).
So, Sin Heng Heavy Machinery has an ROCE of 6.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.
See our latest analysis for Sin Heng Heavy Machinery
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 Sin Heng Heavy Machinery's past further, check out this free graph covering Sin Heng Heavy Machinery's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Shareholders will be relieved that Sin Heng Heavy Machinery has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 6.2%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.
What We Can Learn From Sin Heng Heavy Machinery's ROCE
To bring it all together, Sin Heng Heavy Machinery has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.