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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? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Pavillon Holdings (SGX:596) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Pavillon Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = S$3.3m ÷ (S$62m - S$5.3m) (Based on the trailing twelve months to December 2023).
So, Pavillon Holdings has an ROCE of 5.8%. In absolute terms, that's a low return but it's around the Hospitality industry average of 5.1%.
See our latest analysis for Pavillon Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Pavillon Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Pavillon Holdings.
So How Is Pavillon Holdings' ROCE Trending?
The fact that Pavillon Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 5.8% which is a sight for sore eyes. Not only that, but the company is utilizing 32% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Key Takeaway
Overall, Pavillon Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 165% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One final note, you should learn about the 2 warning signs we've spotted with Pavillon Holdings (including 1 which shouldn't be ignored) .