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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? 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 Pavillon Holdings (SGX:596) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Pavillon Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = S$3.4m ÷ (S$122m - S$36m) (Based on the trailing twelve months to June 2024).
Thus, Pavillon Holdings has an ROCE of 4.0%. In absolute terms, that's a low return but it's around the Hospitality industry average of 3.4%.
See our latest analysis for Pavillon 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're interested in investigating Pavillon Holdings' past further, check out this free graph covering Pavillon Holdings' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
The fact that Pavillon Holdings is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.0% on its capital. In addition to that, Pavillon Holdings is employing 113% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
In Conclusion...
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 virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Pavillon Holdings (of which 1 is a bit concerning!) that you should know about.