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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 Hock Lian Seng Holdings' (SGX:J2T) returns on capital, so let's have a look.
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 Hock Lian Seng Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = S$30m ÷ (S$345m - S$72m) (Based on the trailing twelve months to June 2024).
Therefore, Hock Lian Seng Holdings has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.
Check out our latest analysis for Hock Lian Seng Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hock Lian Seng Holdings' ROCE against it's prior returns. If you're interested in investigating Hock Lian Seng Holdings' past further, check out this free graph covering Hock Lian Seng Holdings' past earnings, revenue and cash flow.
What Can We Tell From Hock Lian Seng Holdings' ROCE Trend?
The trends we've noticed at Hock Lian Seng Holdings are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 39%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 21%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
Our Take On Hock Lian Seng Holdings' ROCE
To sum it up, Hock Lian Seng Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 18% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.