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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Soilbuild Construction Group's (SGX:V5Q) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Soilbuild Construction Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = S$24m ÷ (S$333m - S$178m) (Based on the trailing twelve months to December 2024).
Therefore, Soilbuild Construction Group has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Construction industry.
View our latest analysis for Soilbuild Construction Group
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 Soilbuild Construction Group's past further, check out this free graph covering Soilbuild Construction Group's past earnings, revenue and cash flow .
So How Is Soilbuild Construction Group's ROCE Trending?
Shareholders will be relieved that Soilbuild Construction Group has broken into profitability. The company now earns 16% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.
On a separate but related note, it's important to know that Soilbuild Construction Group has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. 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.
