If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Samko Timber (SGX:E6R) looks quite promising in regards to its trends of return on capital.
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 Samko Timber:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.093 = Rp129b ÷ (Rp3.4t - Rp2.0t) (Based on the trailing twelve months to June 2022).
Therefore, Samko Timber has an ROCE of 9.3%. On its own, that's a low figure but it's around the 8.0% average generated by the Forestry industry.
See our latest analysis for Samko Timber
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 Samko Timber's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Samko Timber has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 9.3% on its capital. In addition to that, Samko Timber is employing 170% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a side note, Samko Timber's current liabilities are still rather high at 60% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
Long story short, we're delighted to see that Samko Timber's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 33% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.