In This Article:
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Stamford Tyres' (SGX:S29) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Stamford Tyres is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = S$9.3m ÷ (S$211m - S$80m) (Based on the trailing twelve months to April 2024).
So, Stamford Tyres has an ROCE of 7.2%. On its own that's a low return, but compared to the average of 5.8% generated by the Retail Distributors industry, it's much better.
View our latest analysis for Stamford Tyres
Historical performance is a great place to start when researching a stock so above you can see the gauge for Stamford Tyres' ROCE against it's prior returns. If you'd like to look at how Stamford Tyres has performed in the past in other metrics, you can view this free graph of Stamford Tyres' past earnings, revenue and cash flow.
What Can We Tell From Stamford Tyres' ROCE Trend?
Stamford Tyres has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 79% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On Stamford Tyres' ROCE
To bring it all together, Stamford Tyres has done well to increase the returns it's generating from its capital employed. Considering the stock has delivered 34% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.